Burn Rate
Definition
Burn rate is the speed at which a startup spends its cash reserves, typically expressed as a monthly figure. Gross burn rate is total monthly cash spending, while net burn rate subtracts revenue, showing the actual monthly cash deficit the company must fund through its remaining capital.
Formula
Overview
Burn rate is the foundational metric for understanding how quickly a startup is consuming its cash. There are two variants: gross burn (total cash out per month) and net burn (cash out minus cash in). Net burn is the more commonly referenced figure because it accounts for revenue offsetting expenses.
For pre-revenue startups, gross and net burn are identical. Once a company generates revenue, net burn becomes the critical number because it directly determines runway. A startup spending $80K/month with $30K in revenue has a net burn of $50K/month.
Investors scrutinize burn rate relative to growth. A high burn rate is acceptable if it is fueling proportional revenue growth: this is the core logic behind the burn multiple metric. However, burning cash without corresponding traction is the fastest path to running out of money and losing negotiating leverage in fundraising.
Example
A startup with $120K/month in expenses and $45K/month in revenue has a net burn rate of $75K/month.
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