Choosing the Right Burn Rate for Your Company

One of the most common questions I get from founders is what's the right burn rate for my company? And I think this is an essential exercise that all founders should go through in terms of setting out the right burn rate for your company. But it's really hard to give generic advice. So oftentimes I try to walk people through the following framework when trying to set the right burn rate for their company. There are, I think, a few key inputs to consider before deciding what burn rate makes sense for your company. First and foremost is what kind of company are you building? Generally speaking, enterprise software companies cost more to build than simple consumer apps and hardware companies cost more to build than enterprise software companies. So step one is what kind of company are you building? And what do you need to be able to demonstrate and prove in order to show strong evidence of product market fit? Second, where are you on that product market fit journey? If you're starting from scratch, it's hard to know how long it's going to take for you to both build a product, launch it, and find product market fit versus companies that already have some level of product market fit. The question is often then how much money should we spend on growth relative to preserving our Runway? And I think this is the way I would think about it if I were in the shoes of a pre seed founder and for us, a precursor. Pre seed really means someone who's raising that first million dollar round doesn't have product market fit yet, probably doesn't even have product built. Most of those rounds, as I said, are 500k to a million dollars in size. So my general advice is if you can keep your burn rate within $50,000 a month plus or minus 25k, you're probably within the safety zone. You go much above $75,000 a month in burn, you run the risk of shortening your Runway and you might run out of cash before you've been able to find product market fit. If you go much below 25k, I as an investor would question whether or not venture capital dollars from investors or angels actually can change the trajectory of your company. You might have in fact been better off continuing to bootstrap and not raising money at all. However, for those companies that have achieved some level of product market fit, I think differently. So we also have seed companies in our portfolio and my advice to them is different. We have two flavors of seed company. We have companies that simply skip right to the seed round. Never raise that first incremental product market fit finding pre seed round. So they're born into Life with 2 to 3 million dollars in venture capital at their disposal. For those companies, I think the right burn rate is probably more like $100,000 a month plus or minus 25k. If you let that drift up too much higher, you run the risk of running out of money before you've really achieved the level of product market fit you'll need to unlock the next round. And if again, if you're burning much less than that, I'd question whether you actually needed the capital in the first place. And if you are a seed company lucky enough to have some level of product market fit and you're listening to this video, my general advice is a burn rate of around $150,000 per month plus or minus 25k is probably appropriate given that the real question here is how should you spend money in order to lean into growth? And if you're leading a company where sales are really important, that safety number might be more like 200 225. And if you're leading a company that has more of a product led growth strategy or is more aligned on marketing number might be lower. But again, the real question for you as the founder is what's the right balance between spending and Runway given where you are in product market fit finding and growth. So hopefully this is helpful in terms of being some useful guide posts as you try to set the right burn rate for your company.