Forward Burn
The most important number at a venture-backed startup is the cash balance. The second most important number is your burn. People often report burn as a backward looking metric, meaning that the they take the decrease in cash over a period of time and say that that’s their burn. As a founder/operator, you need to think about burn as a forward metric. Critically, the costs that you incur moving forward are unlikely to be the same as the costs that you have previously incurred. You need to have a view on what those forward costs will be and as a result, how many months/years of runway you have in cash.
Your goal, especially at early stages, is to de-risk your startup so that you can raise the next round of funding. At all times, you should know the cash required to get to that goal and how it relates to your forward burn. One pitfall I have seen founders make is having a timeline to raise that only works with their backward facing burn. For example, a start-up might be burning $100k a month, with $1m in the bank and the expectation that they will go out to fundraise after completing field tests of their product 6 months from now. In their budget, they’ll be hitting market with 4ish months of cash on-hand. Tight, but not necessarily a death blow. However after correctly calculating their forward burn, they realize that the field trials themselves will cost about $300k. All of a sudden they realize that they’ll be going to market with $100k in the bank.
In this hypothetical, the startup still has a few options. They can cut salaries, they can start raising bridge funding ahead of the round. Had they planned further ahead they could have avoided this altogether. Life isn’t black and white like this but at early-stages cost are likely growing. Understanding where your costs are going rather than just where they’ve been will prepare you for scaling your business and raising future funds.
So how are you building your forward burn?
First - What does you backward-facing burn look like?
What did you spend last week, month and year?
What did you spend it on?
Second – What do you need moving forward?
Going vendor-by-vendor, will your usage of them increase, decrease or stay the same
What are you trying to de-risk, how much will it cost to do that de-risking?
Third – Actualize your predictions
Keep track month over month / week over week.
Confirm that your cost projections are in-line with your budget.
Update forward expectations accordingly.
Some notes and helpful tips!
Rough numbers are better than omitted numbers! If you think that there may be a cost but are unsure what it will be, add the cost. Uncertainty is an opportunity to de-risk along the way.
The larger your customers, the more companies tend to struggle with AR and collections. Building in conservative expectations about collections will help with cash management over the longrun.
When it comes to forward burn, the calculations are often messy because timelines and costs are opaque. The guiding question that are trying to answer is this: “if everything goes according to the baseline plan, when will you run out of money?” For an early stage startup, I advise that that date is never below six months from when you intend to have an infusion of capital.
