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How to Manage Your SaaS Startup’s Burn Rate

Here’s the deal with raising growth capital for your startup: it will only last you so long, and you’ll spend it far faster than you ever imagined.

Managing your burn rate, or the pace at which you spend your cash, requires a balanced approach to risk. There’s no getting around it; you need to spend money to make money.

So, at certain times in your startup lifecycle, you’ll hit the gas pedal and blow through some money to make things happen. On the other side, you should be prepared to slow down (or pull the emergency brake) if you’re moving through your capital too fast.

The thought of finally obtaining the funds to take their business to the next level, and the possibility that it could all slip away (or burn up, if you will) keeps many founders up at night. You might find yourself fixated on questions like:

Knowing how to calculate your burn rate, and keep it low, are fundamental to startup success. Read on to see how it’s done.

How to Calculate Your Cash Burn Rate

Your burn rate isn’t a one-time calculation. It’s not something you cross off your list. Rather, it’s something you closely monitor so you can thoughtfully approach big-ticket expense decisions, such as hiring.

Your burn rate will vary drastically compared to other startups. This is not about “keeping up with the Joneses”; it’s about being reasonable with your spending so that you don’t have to shutter your business.

A few terms to understand:

  1. Gross burn: Your average monthly expenses. It doesn’t matter what money you’re making (or if you’re making any at all)

  2. Net burn: Your monthly expenses (gross burn) minus your monthly revenue

  3. Runway: Cash you have in the bank, divided by your net burn

Cash burn calculation example:

You’re a SaaS company with 9 employees. You have a gross monthly burn of $80,000. You’re bringing in $20,000 a month in revenue, so your net burn is $60,000. You just received a $2M round of funding. This gives you a runway of about 33 months ($2M divided by $60,000). This is great, but now that you’ve received a nice funding round, you’ll likely scale up fast by hiring additional people and investing in more resources, dramatically increasing your burn rate. It’s not uncommon for a serious equity raise to buy a fast-scaling company 12–18 months of runway, if not less.

Startup investors, including venture capital firms, will ask you about your burn rate. They’ll want to look under your financial hood to see how you’re spending your money and if you’re disciplined in your approach.

One thing they look for: startups that spend wildly and irrationally after receiving investments. These startups may lose their scrappy nature and frivolously overspend, something VCs and other investors want to avoid.

But don’t feel like your burn rate must be zero.

Smart technology investors know SaaS companies need to make hefty investments up front to gain customers and lock them in, long before they’ll see a profit from those new customers. They’re comfortable with high burn rates — if your growth rates are rising in parallel.

What’s a “good” burn rate?

Of course, there’s no one answer, which makes burn rate so tricky. How do you gauge if you’re spending too much or even too little?

Venture capitalist Fred Wilson suggests that $10K per employee per month is a good number to aim for. This per person rate includes salary, rent, the overhead, and any tools or resources. It’s just meant to give you a quick calculation to do a health check on your burn rate.

Of course, burn rate expectations—from a VC vantage point—will shift based on your lifecycle stage. Your burn rate when you’re in the MVP-building stage (which, according to Wilson, should be ~$50K), will be different than your post-release growth stage, when you’re on a mad dash to gather users (at which Wilson thinks you should keep burn to $100K or less).

Wilson’s rule isn’t the only one out there. Some say you should aim to “spend less than 10 percent of your last capital raise per month. If you raised $1.5 million, then you should spend less than $150,000 per month.” And still others note that if you have less than a year to go before you’re at zero cash, you better be in full-blown survival mode, scrambling to raise more money ASAP.

There is no easy answer, so take these “rules” with a grain of salt.

7 ways keep your burn rate low

The moment you take money from investors, especially a VC, you’re going to be expected to accelerate your growth — to the tune of ~100% year over year. You’ll need to spend to make that happen. It’s all about making smart spending decisions, at the right time.

Entrepreneurs have come up with a slew of creative ways to go about managing their cash burn rates: