What is the right amount of burn for startups?
Everyone knows the startup mantra:
- Start early
- Raise when you dont need money
- Keep a fair runway
- Manage your burn
Unfortunately, out of every question managing your burn is the most difficult to answer. Anyone who has a very specific answer is bluffing since there is no right answer here.
Your burn should depend on the following things:
How constrained are capital markets at present? Is it difficult to access capital quickly? Will it take a long time to raise capital? Then preserve cash and manage your burn
Are your existing investors willing to participate? If yes, then start having open conversations with them from the beginning to maintain a sufficient runway
What does your cap table look like? Is it complicated? Have you diluted too much? Then access might be low, and you will need to manage your runway
Are your valuations reasonable? Was your last round at a bumper valuation? If yes, then investors would most likely want to wait for execution before putting in more money. Please slash costs and manage the burn
When in doubt, manage burn!