Tim Brady - How do you calculate burn rate, runway and growth rate? | Summary and Q&A

TL;DR

Learn how to calculate and manage burn rate, runway, and growth rate for early-stage startups, important metrics that every investor will ask for.

Key Insights

• 💰 Burn rate is a measurement of monthly cash flow, not profit and loss. It's important to accurately track the amount of cash going out and coming in each month.
• 🛫 Runway is the number of months you have left before running out of cash. Calculate it by dividing your cash on hand by your burn rate. Running out of cash is a common reason why startups fail, so tracking runway is crucial.
• 📈 Growth rate measures how fast your sales are increasing and indicates if your product is in demand. It is calculated by dividing this month's revenue by last month's revenue, subtracting one, and expressing it as a percentage.
• 🔄 Growth rate should be calculated as a compound number to accurately reflect increasing revenues. Failing to compound the growth rate can give a misleading impression to investors and may harm your credibility.
• ❌ Make sure to accurately categorize your revenue as recurring or non-recurring. Recurring revenue, such as monthly subscriptions, is valued more highly by investors due to its predictability. Non-recurring revenue, like one-off product sales, may not be as attractive.
• 💼 Startup founders should regularly monitor and analyze their burn rate, runway, and growth rate. This data is crucial for making strategic decisions and attracting potential investors.
• 📆 Monitoring these metrics on a weekly basis allows for better decision-making and agility in managing your startup's finances.
• 🔍 It's essential to have a clear understanding of how to calculate and express these metrics to potential investors. Inaccurate or misleading information about burn rate, runway, or growth rate can harm your chances of securing funding.

Transcript

so how do you calculate burn rate runway and growth rate let me first start by saying that these are three very important metrics that are critical for you to manage your early stage startup and every investor that you talk to will ask you for them so you should know them off the top of your head let's start with burn rate as the name would suggest... Read More

Questions & Answers

Q: How is burn rate different from profit and loss?

Burn rate focuses on the cash flow of a startup, measuring the amount of cash being spent, while profit and loss take into account expenses and revenue, focusing on overall financial performance. It's possible for a startup to have a high burn rate but still be profitable if they have significant cash reserves.

Q: Why is it important for startups to calculate their runway?

Calculating the runway enables startups to understand how long they have until they run out of cash, allowing them to make informed decisions and prioritize actions. Running out of cash is often a significant factor in startup failure, so monitoring runway is crucial for survival.

Q: How can fluctuating expenses or growing cash inflow affect the calculation of runway?

When expenses or cash inflow fluctuates, a monthly financial forecast is needed to accurately estimate the number of months of cash remaining. By estimating cash going out and coming in for each month, startups can adjust their runway calculation accordingly.

Q: Why is growth rate an important metric for investors?

Growth rate indicates how quickly a startup's sales are increasing, reflecting the demand for its product or service. Investors are interested in high growth rates as it signifies market potential and successful market penetration.

Q: How should growth rate be expressed to accurately reflect a startup's performance?

Growth rate should be expressed as a compound number, taking into account the increase in revenue over time. Using the acronym CMGR (compounded monthly growth rate) is preferred. Failing to compound growth rate might misrepresent a startup's performance and lead to investor doubt.

Q: What is the difference between recurring and non-recurring revenue?

Recurring revenue consists of regular payments from customers for an ongoing service or subscription, providing predictability and stability to a startup's revenue stream. Non-recurring revenue includes one-off purchases or unique transactions that do not have a recurring nature.

Q: Why is recurring revenue more valued in venture investing?

Recurring revenue is more highly valued because it demonstrates ongoing customer commitment and the sustainability of a business model. Predictable revenue streams make startups more attractive to investors, as they imply long-term profitability and reduce risk.

Summary & Key Takeaways

• Burn rate measures the amount of cash a startup is spending on a monthly basis and is calculated by subtracting cash coming in from cash going out.

• Runway is the number of months a startup has before running out of cash and is calculated by dividing the cash on hand by the burn rate.

• Growth rate measures how fast a startup's sales are increasing and is determined by dividing the current month's revenue by the previous month's revenue, expressing the result as a percentage.