Burn rate and runway

Burn rate is how much cash a company uses up in a month. Startups often spend more than they earn, and the gap is paid from money raised from investors. The size of that gap, month after month, is the burn.

There are two versions. Gross burn is all the money going out: salaries, rent, cloud bills, marketing and everything else. Net burn is the money going out minus the money coming in from customers. Net burn is the number that matters most, because it is the amount by which the bank balance actually falls. A company that spends ₹2 crore a month and earns ₹1.2 crore has a gross burn of ₹2 crore and a net burn of ₹80 lakh.

Runway is the time left before the money is gone, if nothing changes. The formula is simple: cash in the bank divided by net monthly burn. A startup with ₹12 crore in the bank and a net burn of ₹1 crore a month has twelve months of runway.

The word comes from aircraft: how much strip is left before the plane has to take off. A startup must either reach profit, raise new money or cut costs before the strip ends. The calculation is only a snapshot. If burn grows every month, as it does when a company hires and spends on growth, the real runway is shorter than the simple formula says.

• Net burn = cash going out minus cash coming in, per month
• Runway in months = cash in the bank divided by net burn
• Zero-cash date = today plus the runway, which is the latest the next round must close

There is no legal rule, but there is a common habit. Many founders and investors want at least 18 months of runway right after a funding round, and treat anything under 6 to 9 months as a warning. The reason is that raising money takes time, often three to six months from the first meeting to the money arriving, and it takes longer when markets are tough.

A founder who starts raising with only three months of cash left has little power in the talks, because investors can see the deadline. A founder who starts with a year of runway can say no to a bad offer. So runway is not only a survival number, it is also a negotiating position.

Funding for startups slowed in India from 2022 as global interest rates rose and investors became more careful. Many companies that had planned around raising a new round every year found that the next round was late or smaller. The usual response was to lower burn: fewer hires, smaller marketing budgets, closing weak product lines and, in some cases, layoffs.

This is why news about layoffs or shutdowns often comes with a line about extending runway. Cutting burn by a third can stretch a twelve-month runway to eighteen months without raising anything. The trade-off is slower growth, so a company cuts only as much as it must.

There are only two levers: bring in more cash, or spend less of it. On the spending side, a company can slow hiring, renegotiate with vendors, cut paid marketing that brings low-quality customers, and move to cheaper offices or cloud plans. On the earning side, it can raise prices, collect payments faster from customers, or sell more to customers it already has.

A third route is outside money that is not a full equity round: a bridge round from existing investors, venture debt, or revenue-based financing. These add months, but they have costs of their own, such as repayments, so they should be treated as a way to reach a clear milestone, not as a permanent fix.

Be careful with the headline numbers. A company that raised ₹100 crore does not have ₹100 crore of runway. Part of the money may arrive in instalments, part may be a secondary sale in which existing holders sell shares and the company gets nothing, and the company may already have spent a good share of earlier funds.

Useful questions are: how much did the company lose in its last full year, how much cash did it have, and how fast is the burn changing? Annual reports filed with the Registrar of Companies often give the loss and cash, which let you make a rough estimate. A rough estimate is enough. Burn is a measure of risk, not of quality: a fast-burning company can be very healthy if its spending buys growth that investors are willing to fund.

Burn multiple is a related idea used by investors. It divides net burn by the new recurring revenue added in the same period. If a company burns ₹3 crore to add ₹1 crore of annual revenue, its burn multiple is 3. Lower is better, because it shows how efficiently spending turns into growth.

It adds context that raw burn lacks. Two companies can both burn ₹2 crore a month, but the one adding more revenue for that money is in a stronger position. Investors use both numbers together: runway for survival, burn multiple for efficiency.