The Burn Rate Balancing Act: Finding the Sweet Spot for Your Company's Growth

Several surveys were conducted to understand the prevalence of the burn rate metric in startups:

• One said that 69% of startup founders considered burn rate a key performance indicator (KPI) for their business. However, the same survey also found that 54% of startups had less than 12 months of runway, indicating a potential problem with burn rate management.
• The National Venture Capital Association survey found that 75% of venture capitalists considered burn rate an essential factor in their investment decisions.
• Interestingly another survey concluded that 74% of startups failed due to premature scaling, which often leads to an unsustainable burn rate.

Although these surveys are unlikely to take under consideration the most recent market trend pivoting to profitability, their merit remains sound across the startup industry. Most investors pay attention to the metric and understand the consequences. If that's the case, then Go-To-Market teams should understand this metric well to help your investors achieve financial objectives.

Burn Rate occurs when a company spends its cash reserves to cover operating expenses before generating positive cash flow. It represents the amount of money a company loses or "burns" each month to operate.

The general recommendation is for a startup business to have 12-18 months of expenses without assuming the new income will occur. This is not necessarily your FCST but rather a descriptive metric (nothing is preventing you from creating a predictive model based on several other assumptions). However, considering the current funding scarcity, limited funding rounds, and higher financial scrutiny, the months ahead might sometimes require a longer timeline beyond 18 months (or attaining the Holly Grail of Profitability).

Let's use one of the FinTech companies, Brex, as a hypothetical example. Again, this company is not publically traded, so the numbers for the company are purely speculative.

To calculate Brex's Net and Gross Burn Rate, we divide the operating expenses by the cash balance:

1. Input Data:

• Beginning cash balance: $200,000,000
• Ending cash balance: $150,000,000
• Operating Expenses: $70,000,000
• Capital Expenditures: $30,000,000
• Number of months: 12

2. Net Burn Rate:

• Net Burn Rate = (Beginning Cash Balance - Ending Cash Balance) / Number of Months
• Net Burn Rate = ($200,000,000 - $150,000,000) / 12
• Net Burn Rate = $4,166,667 per month

3. Gross Burn Rate:

• Gross Burn Rate = (Operating Expenses + Capital Expenditures) / Number of Months
• Gross Burn Rate = ($70,000,000 + $30,000,000) / 12
• Gross Burn Rate = $8,333,333 per month

So, for these 12 months, Brex had an NBR of $4,166,667 per month and a GBR of $8,333,333 per month.

Several other fintech companies are similar to Brex and may be publicly traded or publicly disclose their burn rates. Here are a few company examples that Brex could benchmark themselves (larger corporations might be harder to tease apart specific data but at least give some industry insight; again only my guess):

1. Ramp
2. Divvy
3. Airbase
4. Stripe
5. American Express
6. Chase
7. Square
8. Capital One

OK, that was pretty straightforward when you could access the public records or companies that published their data (sometimes companies do that despite their private status). The real problem starts when you operate non-public traded data. You will use it in an estimate requiring more precision and continuing refinement. However, this should allow you to make assumptions about your competitors. For example, your teams could do the following:

• Industry Benchmarks: You can look at industry benchmarks to get an idea of the burn rate for a company in that industry. While these benchmarks may not be accurate, they can provide a rough estimate. In addition, you can use the available services like Pitchbook to create industry views and regularly refresh. This might be more powerful than you think, as it sets the tone in the industry and expectations across the board regardless of the company's size.
• Competitor Analysis: To estimate their burn rate, you can analyze your competitor's business model, revenue growth, and other financial metrics. You can also look for any public statements or reports your competitors have made about their financial performance, which may provide insights into their burn rate. However, you must dig deeper into the 10K and 10Q reports to understand the changing dynamic around the cash flow. Many companies publish their intention around investment or spending tightening. If your competitor received new funding, you should make assumptions about where they allocate that cash.
• Networking: You can network with people in the same industry and know your competitor's financial performance. This can include industry analysts, consultants, or investors. Let's be clear. I'm not encouraging anyone to start economic espionage or unethical behavior. Ethics matter; we must maintain a professional demeanor without violating the game's rules. For the same reason, please be aware of any questions you might ask.

It's important to note that these methods could be more precise, and the accuracy of the burn rate estimate will depend on the quality of the data available. But it's also true that you are not left without anything to work with, and you can come up with a couple of good data points before your following quarterly results review.

Let's wrap up with a few critical actions that Revenue Operations teams should take based on the Burn Rate readout:

1. Optimize pricing and packaging: work with the product and sales teams to analyze pricing and packaging strategies to ensure the company maximizes revenue while maintaining competitive pricing. The pricing cannot be accidental or based on gut feeling. This results from the groundwork around the critical volume driver, understanding your audience, association with the solution your company provides, and many other factors that should help you define that. E.g., would you let your teams sign an agreement with a prospect to have additional revenue? If the answer is yes, is this contract covering its cost? Why would you agree to have pricing that is not securing the profit? Yes, how you trade matters.
2. Improve customer acquisition efficiency: constantly work with marketing and sales teams to identify the most effective channels and campaigns for acquiring new customers. This includes optimizing the customer acquisition cost (CAC/ CTS) and reducing the sales cycle time. Is every expense necessary? Are we spending where we should? Would you spend your own money the same way? Make sure you keep that in check.
3. Increase customer retention and expansion: easier said than done. Identify the customers the customer success team must work with to improve customer retention rates. Ensure you start early in the customer relationship without letting your teams focus on retention within the last 90 days of the 12 months contract. If you don't fix the process early, you will likely "cook" your retention rates within the first instead of the last 90 days of your contract. Guess what? If you are good at implementing early-stage renewal process steps to build relationships, the upsell and cross-sell opportunities will follow. Ensure that your incentive plan includes appropriate metrics that will help optimize the customer lifetime value (LTV) and reduce churn rates. In the end, product and relationship are key.
4. Monitor and analyze value-based metrics and think ahead: you must monitor and analyze metrics that help you to understand if prospects and customers see value in your product/ solution. If your business sucks in customer retention, your Net Revenue Retention won't improve either. You have to put metrics in order and market perspective first. Another example of not being a sufficiently valuable solution happens in pipeline generation, campaign responses, and the MQL conversion process. If you detect this early in the prospecting process, measuring value-based metrics will help your organization keep the lights on. Remember that what starts at an early stage of slower conversions will impact your company in 6-12 months.
5. Implement operational excellence: always work on plans to reduce costs and improve productivity. I highly encourage RevOps teams to work closely with Finance teams to understand the nature of the budgetary spending and identify specific actions that both teams will take to improve the GTM leaking spending leaking bucket. I recommend that RevOps leaders implement expectations around that area in their annual/ bi-annual reviews with their teams. Making this mandatory can help foster the culture of deliberate spending. In addition, RevOps leaders should constantly look for better and margin-oriented ways of doing business.
6. Please don't stop with the basics and go deep into the metric. When building the metric, ensure that you include a time horizon, forecast for your next 18-24 months, and track changes over time to address the seasonality and linearity fluctuations which can be pretty revealing. You can't settle for a retrospective rear mirror view only. To get this right and add value, you must look ahead and show the interdependence between different cash and cost-generating sources.
7. Bring them together. Although Burn Rate is a high-level metric mainly used by or prepared by finance, the fun starts when you put this together with your operational FCSTed numbers from GTM functions. For example, connecting Sales & Marketing contributions with Burn Rate is a critical function that Revenue Operations teams must work on. That's how the measurement becomes cohesive, explaining to internal stakeholders and giving a better insight into the board meetings dominated by the financial statements. This will help you to facilitate many internal conversations with your business partners.