What Do Investors Mean by Burn Rate?
You’ve been working hard on your business, and the time has come to chat with investors. Something that they’re going to ask you about is your burn rate. Need a little more insight on how this conversation will go? You need to get to know burn rates a little better.
Breaking Down Burn Rate for Your Business
- Monthly burn rate is the amount of net dollars (change in cash, excluding investment dollars) that your company spends in a month.
- Average burn rate over X months is the average spend amount over those months.
- Total burn for X months is the sum of the money spent over that time period.
When investors ask about burn rate they can mean a lot of different things (any number of months or time period), so I recommend getting clear guidance from them on what time frame they’re wanting and whether they are looking for an average or total amount so that you are answering their question correctly.
What Investors Really Want to Know When They Ask About Burn Rate
Typically, when investors are talking bout burn rate they’re wanting the average spend per month over time. But the part that is subjective here is the time frame. How many months back should we go? In the case of most growth startups, the money you are spending per month is increasing due to increased expenses as you grow, so I would expect to use a shorter time frame to give a more accurate current understanding of what you will spend over the next several months (3 months is a typical time frame for growth businesses).
The burn rate is usually used by investors to determine how much you are spending (on average each month right now) to determine how many months of capital you have left before you run out of cash.
If you want to dive into burn rate a little further, here’s a great article on the topic.
Do you have more questions about what investors are really asking? Schedule a free 30-minute chat with a CFO! We’ll help you understand things a little better so you can be prepared for your next investor meeting.