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Understanding Burn Rate and How It Affects Your Startup

Burn rate is an important metric to consider when seeking venture capital. If you’re planning to launch a new business — or if you’ve already launched a new business — you want to secure financing from a venture capital firm. Venture capital firms are financial organizations that specifically invest in startups. When seeking venture capital, though, you can’t ignore your startup’s burn rate.

Understanding Burn Rate and How It Affects Your Startup

What Is Burn Rate?

Burn rate is defined as the rate at which your startup spends its venture capital prior to generating revenue. Most startups, of course, don’t generate revenue immediately. It can take months or even years until they’ve worked out their products or services and finalized their operations. Burn rate reflects how quickly your startup uses its venture capital before generating revenue.

You can calculate your startup’s burn rate for a given period by taking its starting balance — the amount of venture capital you obtained — and subtracting it by your startup’s ending balance. Next, divide this number by the total number of months in the period. The end result will be your startup’s burn rate.

The Impact of Burn Rate

Why should you care about burn rate? Venture capital isn’t a permanent financing solution. Like with most other forms of financing, it’s only a temporary solution. If you spend it too quickly, your startup may be forced to close its doors before it’s able to sell products and services and, thus, generate revenue.

A high burn rate can also make it difficult to secure additional financing for your startup. Lenders, for example, may think twice before loaning your startup money if it has a high burn rate. Other investors may also be hesitant to invest in your startup. For easier financing, you should strive to avoid a high burn rate.

In Conclusion

Burn rate isn’t a concern for all startups. Rather, you only need to worry about it if your startup is financed with venture capital. The rate at which your startup spends its venture capital will determine its burn rate. The faster your startup spends its venture capital, the higher its burn rate will be. A high burn rate can make it difficult to secure additional financing, or it can even cause your startup to fail.

This article was brought to you by Intrepid Private Capital Group – A Global Financial Services Company. For more information on startup and business funding, or to complete a funding application, please visit our website.

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Intrepid Private Capital Group • July 8, 2021

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