Managing your company’s burn rate: A guide for Startups

Burn rate is a key metric that helps understand how long a startup can survive before it must secure funding. Given how 29% of startups fail because they run out of money, founders must pay close attention to their burn rates, and the underlying cost structures, and attempt to optimize costs whenever and wherever possible.

Hence, in this article, we will explain what the burn rate is, how it impacts your runway, and some factors that contribute to unsustainable burn rates. Read on to learn more!

Burn Rate: How long can your business last?

A startup’s burn rate tells us how quickly it is burning through its capital. Typically, we calculate this as a startup’s monthly operating expenses and use that to calculate the startup’s runway, i.e. the amount of time the startup has before it runs out of money.

How To Calculate Burn Rate?

To get a clearer picture of your startup’s runway, you can calculate the runway using the net burn rate which is the total monthly operating expense minus the monthly revenue.

Formulas for burn rate, net burn rate, and runway are as follows.

Term	Formula
Burn rate (a.k.a. gross burn rate)	Gross burn rate=Total monthly operating expenses
Runway (based on gross burn rate)	Runway=Total capitalGross burn rate
Net burn rate	Net burn rate=Gross burn rate-Monthly revenue
Runway (based on net burn rate)	Runway=Total capitalNet burn rate

A startup must optimize expenses to extend its runway until it achieves meaningful progress toward goals set in previous funding rounds, This would better position the startup to raise funds in a new funding round.

For instance, OpenAI was expected to lose $5 billion in 2024 despite a revenue of $3.6 billion. Thus, we can calculate OpenAI’s net burn rate by dividing $5 billion by 12 which is roughly $416.67 million. In October, after closing a funding round and securing a credit line, OpenAI’s total liquidity stood at $10 billion.

Let us calculate OpenAI’s runway based on this information.

OpenAI’s runway = Total capital (in this case, total liquidity) ÷ Net burn rate
= $10 billion ÷ $416.67 million
= 24 months

Thus, OpenAI has 24 months since its last funding to achieve profitability or achieve the goals set in its previous funding round.

How to Determine Good burn rate for startups?

While a good burn rate is one that extends your startup’s runway until its next funding round, it is often impossible to estimate when and if a startup will scale key milestones that allow it to attract investor interest. Hence, you must also understand the median burn rates in your industry.

Average Monthly Burn Rate by Industry

Industry	Average Monthly Burn Rate (2022)
Real Estate and Construction	$13,964.98
Apparel and Fashion	$17,394.29
Business Services, Software, and Applications	$17,507.39
Farming and Agriculture	$33,915.23
Security, Cybersecurity, and Defense	$34,961.70
Transportation, Automotive, Aviation, and Aerospace	$42,799.37

Additionally, if your startup has achieved recurring revenue, its burn rate carries less importance than its burn multiple which can be calculated as:

Burn multiple = Net burn rate/Net new ARR (Annual Recurring Revenue)

This is a financial metric that helps us understand if a startup’s expenditure is justified by the growth it is achieving. This is how you can interpret the burn multiple:

Burn multiple	Interpretation
1	For every dollar spent in excess of the monthly revenue, the startup is adding a dollar in recurring revenue
0.5	For every dollar spent in excess of the monthly revenue, the startup is adding two dollars in recurring revenue
1.5	For every three dollars spent in excess of the monthly revenue, the startup is adding two dollars in recurring revenue

Is your startup burning too fast? Causes and Solutions

By keeping a close eye on this metric and implementing cost-saving strategies, startups can extend their runway and improve their chances of becoming profitable. Some of the factors that can lead to an unsustainable burn rate are as follows:

Extensive expenditure on office spaces

With the shift towards remote workplaces, a chunk of office spaces remain vacant. Moody’s reports that office vacancies have reached a 30-year high, with 20.1% of spaces currently unoccupied. In such a situation, one must question the rise in quarterly leasing activity since Q1 2023. Since then, there has been a 38% rise in leasing activity by square feet.

Businesses simply do not need the kind of offices they used a decade or two ago. With digital solutions such as Zoom, Microsoft Teams, Slack, and Atlassian, founders can maintain the same level of productivity as office-based teams, even in a remote environment.

Premature hiring

The normalization of layoffs in the tech sector is proof of premature hiring events at large corporations. In February 2025, we saw various US companies such as Sprinklr, Sonos, Blue Origin, Workday, AppsFlyer, Meta Platforms, and Hugging Face collectively lay off more than 8,000 employees.

The primary cause of premature hiring in startups would be founders getting ahead of themselves and hiring excessively before the anticipated demand materializes. In some cases, hiring is seen as a signal of expansion and may appease investors to capture any perceived opportunities.

Another reason for premature hiring would be relying on numbers to solve a problem that would be better addressed by resolving operational inefficiencies.

Extravagant marketing campaigns

Suppose, a campaign convinces 10 million people to try a product but only 1 million can be served satisfactorily, the resources spent towards attracting the remaining 9 million would be wasted.

Well-timed marketing campaigns can significantly boost a startup’s revenue generation, however, extravagant market spending over a premature product is unlikely to drive lead conversions. Overconfidence of founders can result in the prioritization of marketing campaigns over efforts to address gaps in the product. In such situations, no matter how much money is spent on marketing, meaningful revenue growth cannot be achieved.

Lack of financial planning

If a founder does not identify how prices of various inputs could change and identify the optimal course change in each scenario, they risk leading their startup down a sub-optimal path.

Another form of inefficient financial planning is creating a plan at the outset and failing to update or adjust it as circumstances evolve. This approach can lead to overlooking changes in cost structures while ignoring disruptions in other industries that cause higher-cost volatility.

For instance, when modern cloud computing infrastructure was introduced in the 2000s, it eliminated the need to have expensive, on-premise IT hardware. If a company failed to adapt to the cheaper, asset-light, subscription-based models, it would face much thinner operating margins than its competitors.

Premature expansion

About 74% of startups fail due to premature scaling, which often leads to an unsustainable burn rate. Scaling a business too quickly through new hires, facility expansions, or aggressive marketing campaigns can outpace revenue growth and cause the burn rate to skyrocket.

In order to keep up with competition, startups often launch features and expand into new markets prematurely. Early entry does not always guarantee prolonged market dominance. For instance, Skype had almost a decade-long head start over Zoom, however, Zoom’s focus on delivering frictionless video calls made it an invaluable part of remote workplaces.

Eqvista – Actionable valuation insights at your fingertips!

A startup’s burn rate is simply its monthly operating expense. We use this metric to understand how long a startup can be expected to survive with the funds at its disposal, i.e. to calculate its runway.

Don’t let a poorly managed burn rate jeopardize your company’s future. Take control of your finances today—calculate your burn rate and explore strategies to reduce costs and increase revenue. At Eqvista, we enable startups to issue stock-based compensation in a tax-compliant manner through 409A valuations. Contact us to learn more!