Two numbers tell you more about a young company’s health than almost any other: how fast it is spending money, and how long the money will last. Founders watch them constantly, and investors ask for them in the first meeting.
Gross burn, net burn and runway
Burn rate is the pace at which a company uses up cash. It comes in two forms. Gross burn is everything the company spends in a month, from salaries and software to rent and marketing. Net burn is gross burn minus the cash coming in from customers, and it is the figure that actually drains the bank balance.
Runway is the time remaining at the current pace, calculated by dividing the cash balance by net monthly burn.
A hypothetical shows how sensitive it is. A company with 600,000 dollars in the bank and a net burn of 50,000 dollars a month has 12 months of runway. Hiring two engineers that adds 20,000 dollars of monthly cost lifts burn to 70,000 dollars, and runway drops to about 8.6 months. If instead monthly revenue grows by 10,000 dollars, net burn falls to 40,000 dollars and runway stretches to 15 months. One hiring decision erased more than three months, while a modest revenue gain added three.
Why founders start counting early
Raising money takes months, from the first conversations to cash in the bank, and a company with only a few months left has little bargaining power. Many advisers therefore suggest starting well before runway gets short. Runway also shapes ordinary decisions about hiring, marketing and spending, since each choice changes the end date.
Averages help. Net burn can jump around from month to month with annual payments and one-off costs, so founders commonly use a three-month average when calculating runway.
The default alive test
Paul Graham of Y Combinator popularized a sharper question in a 2015 essay. A startup, he wrote, is default alive if, assuming constant expenses and its recent rate of revenue growth, it will “make it to profitability on the money they have left.” If not, it is default dead. The test is useful because it combines the two forces that decide a company’s fate, spending and growth, in a single question, and it makes a founder face whether current trends rescue the company or merely delay the problem.
The burn multiple
A later measure looks at efficiency rather than survival. David Sacks of Craft Ventures introduced the burn multiple in 2020: net burn divided by net new annual recurring revenue over the same period. It answers how many dollars a company burns for each dollar of recurring revenue it adds. A lower number means growth is cheaper, and a higher one means a company is paying a lot for each increment. High burn can be defensible early on, but the number should fall as the business starts to monetize. Benchmarks vary by source, so they are best read as rough guides.
Warning signs
Some patterns suggest trouble even when the runway number looks acceptable: a short runway with no funding plan, spending growing faster than revenue, revenue concentrated in a few customers, customers who pay late so that cash arrives long after revenue is recorded, and forecasts that assume growth without evidence. One-off income counted as if it will recur is a frequent culprit.
Ways to lengthen runway
Companies in a squeeze have several levers.
- Raise prices or cut discounts where the product’s value supports it.
- Defer or cut costs, starting with hiring, tools and marketing channels with weak returns.
- Collect faster, for example by offering annual prepayment.
- Improve retention, since keeping customers is cheaper than replacing them, as covered in our guide to the SaaS model.
- Seek non-dilutive funding, such as grants or revenue-based financing where available.
- Raise equity, accepting the dilution described in our explainer on startup funding rounds.
Each choice has trade-offs, so modeling best-case, expected and worst-case versions is more useful than a single forecast. For a company that already earns more than it spends, burn is zero and runway is open-ended, but cash planning still matters, because customers pay late, costs jump and markets turn.
This is general information, not financial, investment, tax or legal advice.
