What's the right burn rate for your company?
What's the right burn rate for your company? and how does this vary across stages? One of the most discussed topics by founders & VCs both, tune in to hear Avnish Bajaj share a framework to help think through it.
So Avnish, I think the question that is on every single founder's mind is what is the right burn rate for my company, and this doesn’t change across stages or does it?
No of course it changes across stages, I don’t think of burn rate as kind of speed limit that a company should follow and a very simplistic way of looking at it is, say 30, 75, 150, 300, 600, just keep doubling, first one is not a double. What does that mean 30 lakhs a month, 75 lakhs a month, 1 crore fifty a month, 3 crore a month, 6 crore a month. It is by the stage of the company, so when you’re at seed stage, 30 lakhs should be enough for a month. When you’re at next stage 75 and the logic is typically at every stage you learn, you raise a certain amount of money that’s sufficient for 18 to 24 months. So lets take example of seed stage, you’ve raised call it a million-dollar, 6, 7, 8 crore, right?
So at 30 lakhs, 18 months is 5.4 crores, 24months is 7.2 crore. So that’s kind of a best way to think about it. 75 lakhs for 24 months, if you’ve done a proper series A, 20-25 crore, 30 crore, so that’s the best way to think about it more by one way than necessarily just no. of months or how much you are burning but think of it like that but I think more important than how long, is what are you burning? Have you hit product-market fit? When you’re a new company you don’t have revenue you’re burning on everything, rent, people, at some stage you could say that you are burning on – you should never burn on gross margin, but you could be burning on the first contribution margin, then you could be burning on the second contribution margin. We covered some of these in our MVA episode, but the key is you have to stop burning at the unit level, and then your company is healthy but I think these 30, 75, 150, and of course at the end of it burn needs to be zero and you need to be profitable.