Burn Rate & Runway: The Math of Survival
For a VC-backed startup, growth often comes before profit. This means the company is "burning" cash. Understanding this math is essential for discussing strategy and fundraising.
Burn Rate
Your burn rate is the negative cash flow of the company. It's usually measured monthly.
- Gross Burn: Total expenses per month.
- Net Burn: Total expenses minus total revenue. (This is what people usually mean by "burn rate").
Example: "Our net burn is $50k a month, mostly due to hiring three new engineers."
Runway
Runway is the amount of time the company has until it runs out of money.
- Example: "With $500k in the bank and a $50k burn, we have 10 months of runway."
- Action: "We need to start fundraising now because our runway is getting short."
Default Alive vs. Default Dead
This is a famous concept from Paul Graham (Y Combinator).
- Default Alive: If you keep your current expenses and growth, you will reach profitability before you run out of money.
- Default Dead: If you keep your current path, you will run out of money before you become profitable.
Example: "The board is worried because we are currently default dead. We either need to cut costs or accelerate growth."
Useful Phrases
- "We need to extend our runway." (Spend less or raise more money).
- "What's the path to profitability?"
- "We're ramping up spending to capture the market."
- Instagram started as a cluttered check-in app called Burbn. The team noticed users loved the photo feature, so they pivoted to photos only.
Common mistakes
- Confusing traction with product-market fit. Traction from paid ads is not the same as organic demand.
- Ignoring churn. High signups mean nothing if users leave immediately.
- Saying we have fit because we launched. Launching is not fit. Fit is proven by retention and demand.
Practice
A startup has 50,000 signups but 80% leave after one week. Does it have product-market fit? Explain using the vocabulary from this lesson.
A strong answer: No. The startup has traction (signups) but high churn, which means weak retention. Without retention, there is no product-market fit. They need to find out why users leave before spending more on growth.
In the next lesson, you will learn the funding vocabulary that surrounds this journey, from seed rounds to Series A.