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Acceptable Burn Rate?

*(edited with updated/correct language)
We are going to be looking for a seed round of funding soon. We are trying to crunch the numbers to figure out how much we need to ask for, and how long that will last us. But, one variable we can't figure out how to calculate, is what is an acceptable runway? I have been told that the new currency for investors is user growth, not revenue. So, as long as we're growing our user base, what's an acceptable monthly loss to project, and for how long? When should we project a positive revenue flow by? It seems like knowing this one variable will unlock the key to our entire funding pitch.

17 Replies

Karl Schulmeisters
1
0
Karl Schulmeisters Entrepreneur
CTO ClearRoadmap

You do this as though you were running a business.
Gross Revenue - COGS is your net revenue. If negative, you have a burn rate, if positive, you have profit.
.


So figure out your solution.
figure out what it will cost to develop
figure out what it will cost to market
figure out what size sales team you will need initially
figure out what size service and QA team you will need
.

Andthen have a fast but realistic growth curve into the market. And see whatinfrastructure and staff growth you need to support that, and figure what that will cost you vs. revenues you generate.


But no, this is NOT the "one variable that will unlock the key to your funding pitch".. this is just "due diligence"


Your investors will want a 10x valuation 3 years after investment. If you have revenue it will be based on revenue growth rate andbooked revenue


if you don't have revenue but have users, it will be based on theexpected monetizable value of eachuser and the growth rate.


but if you are not 10x valuation, you will not be funded.

Rodrigo Vaca
1
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Rodrigo Vaca Entrepreneur • Advisor
Product & Marketing
Jordan -

I think you're mixing a couple concepts.

Loss = money in - money out. Most VCs expect that you are operating at a loss in the early stages, that's ok. This is an over-simplificaiton of an income statement and just taking it on a cash basis, but it is good enough for this purpose. If you are referring to this, then you need to project how much "runway" do you need. And in a nutshell - if you're losing 10K a month, and you want to be able to last 20 months at this rate so you can prove your model, hit milestones. Then 10k * 20 = you need 2Million. This is related to, but orthogonal to valuation.

"Loss of revenue" typically means that there's revenue that you didn't earn for some reason - for example, your business had to shut down because there as a natural disaster, that caused you to lose revenue (not earn in). That might or might not lead to financial losses.

What you might be referring to, which is usually more interesting to VCs is user attrition - that is - of the 100 customers that you acquired last month, how many are still with you this month. You usually measure this on a yearly basis. I have no insights about the kind of business you're in. In the SaaS/Software world, great companies have 2-4% yearly customer attrition.

Having a high user attrition directly impacts your Lifetime Customer Value, which is what VCs will ask you about. If LTV makes sense, and your CAC (Customer Acquisition Cost) is well below that, then you have a profitable business in the long-term. That's what VCs care about... they expect you to be cash-flow negative right now.
Chris Kitze
4
0
Chris Kitze Entrepreneur
CEO at Safe Cash Payment Technologies, Inc.
Karl is correct. It's not just about your monthly burn. Potential investors are asking that and the amount of cash you have left to figure out when you will be desperate and they can get a good deal.

The point is you need a solid plan for how you are going to get to making money before you run out of cash.

If you spent all the money in the first month (not recommended, just a thought experiment) and it caused cash to flow like crazy, you'd do that. I would focus on trying to get a proof of concept out the door ASAP to prove that everything works and "the dog eats the dog food", then upgrade it. You'll have some good metrics that will give your investors faith in the direction and team. If you don't get any kind of metrics and run out of money, you'd better be good looking or have friends in high places. Good luck.
Jordan Plosky
0
0
Jordan Plosky Entrepreneur
Co-Founder and CEO at ComicBlitz LLC
Rodrigo, thanks for letting me know the proper terminology for what I was trying to describe. It's the first one you spelled out, our runway. So, what is an acceptable runway for investors? I'm assuming that even a seed round might not cover our entire runway before we start seeing a profit? So, what is an acceptable amount of time for a "runway", before we should be turning that corner, and starting to bring in a profit? Thanks for that.
John Seiffer
1
0
John Seiffer Advisor
Business Advisor to growing companies
Fred Wilson said it better than Ihttp://avc.com/2015/06/profits-vs-growth/

But what bothers me about the question is you seem to be looking at what investors want to hear rather than looking at what it takes to build a successful business with a successful exit. That's what investors want - a successful exit.
Kris Bliesner
3
0
Kris Bliesner Entrepreneur
Founder and Chief Technology Officer at 2nd Watch
Jordan, Without knowing more about what your startup is doing its a bit difficult to answer but I've take a stab at a few things to keep in mind. I've personally closed over 7 different financing rounds raising over $50M for 3 different startups so I do have some background here. 1) How quickly can you get your MVP out the door? How quickly can you iterate on it once it is live? There is no wrong answer as I've worked on complicated startups that take years to go to market and content plays that can be live in weeks. 2) If you fast forward time past your seed round, what is the story you want to tell prospective Series A investors? What milestones will you need to reach to show customer adoption or that the business model works and that applying more gas can get you an accelerated growth curve? 3) What cash burn rate are you comfortable with pre revenue and post revenue?. You can and should build a model to help you understand how long your capital will last but you also need to weigh your own comfort level around your burn. Keep in mind fixed vs. variable costs too as there are some things you may have to invest in upfront and some that you can cut loose if things don't go according to plan. My $.02 -Kris
Steve Everhard
1
0
Steve Everhard Advisor
All Things Startup
Not many early stage investors are expecting to take a startup to profitability. Nice when it happens but not necessarily a gate on whether you are investable as an early stage business. What you need to concentrate on in this early stage is what milestones you can hit that will make you investable by others, that will take you through to profit (hopefully). And you'd better hit those metrics way before you run out of money.

If you are on a user recruitment drive you need to explain what that unlocks and how revenues will emerge. Your plan for a volume of users with low attrition doesn't necessarily make you an investment bet if you don;t understand the levers that drive revenue in your model. Volume might be it, but quality and engagement are likely to be better goals as long as the market potential is there. In other words if you recruit the only three people likely to use your business then they better be high spenders, live long lives and believe you are the only solution for them.

Ultimately it comes down to believing in your team, your potential, approach and ability to carry both the technical and business challenges of your enterprise. As the Fred Wilson quote above nicely summarises, if your goal is to get early money under any pretence you are grifting and not building a business.
Andrea Raimondi
0
0
Andrea Raimondi Entrepreneur
Computer Software Consultant and Contractor
Now, I am not a big fan of VCs in general, however the math to me seems simple: keep costs as low as possible and profit (not revenue...) as high as possible, within reason. It is a lot easier to raise prices than to lower them (even though, some studies show that price doesn't really matter). Let the dollars make sense and then try forecasting "What happens if..." scenarios where you lose, say, 10% of paying customers, then one for 50% and one for 100%. These will form the base of what you can expect (reasonably) by making an average of the various values. More scenarios you put in, the better.

This will also help you focus on what could possibly go really wrong and account for those things in your daily strategy (which you need to have anyway).

A
Hunter Ashmore
1
0
Hunter Ashmore Entrepreneur • Advisor
Making a Difference

I know others said what I am about to, but I want to reinforce some of these points:


Agreed that you are asking the wrong question. It isn't "what is acceptable to investors?" but rather "how much will it take to be profitable and reach an exit?" This isextremelyimportant! Your business model and execution determine how much you will need, not your investors.


Regarding how much is "enough"; you probably will not raise it all at this moment, since multi-round financing is standard for almost all early-stage investors now. It is their way of minimizing risks as they search for the successful startups. Most investors will want a realistic outline of the follow-on rounds required to get to an exit. Future investment rounds will determine how much capital they will need and/or their potential dilution over time Given this context, validating customer demand as early as possible with as small an investment as possible will allow you to demand better terms in a follow-on round.


There are three answers you need to provide to investors. 1) How much do you need now? 2) How much will you need before an exit? 3) How far away is an exit?


Here is an example of how to answer these questions: draw up your milestones for the minimum product required to validate customer/market demand, the fully developed product, the scale required to reach profitability, and the requirements for an exit. What do you have to prove, validate, or develop in each round?


You should be able to come up with a conservative estimate for items like revenue, headcount, overhead, marketing, etc. for each stage. This tells you your burn rate, but also tells you what you need in each round.This is what you then present to investors.

Jordan Plosky
0
0
Jordan Plosky Entrepreneur
Co-Founder and CEO at ComicBlitz LLC
Hunter, Thank you for the very thoughtful reply. This is the kind of information I was looking to learn. And no, I'm not trying to run by business guided by investors, but I do have to appeal to them in order to raise funds, right?
This was extremely helpful, knowing to outline a long term fundraising plan.

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