Burn rate and runway: how to calculate both and what they decide

Marlow, a made-up software startup, closed its seed round six months ago with $1,200,000 in the bank. On the day it closed, the founders knew how long that would last: fifteen months, at the pace they planned to spend. Tonight the bank balance shows $720,000, and the number they need is not on the screen. It is the one that comes from dividing the balance by what the company now loses each month, and it has quietly dropped to six. Nothing dramatic happened in between. Two ordinary things did: time passed, and two engineers were hired.

This is the situation burn rate and runway exist to describe. They are the two numbers finance people reach for first when a company is spending money it raised rather than money it earned. This page defines both, runs Marlow’s six months through the arithmetic, and shows how investors, lenders and auditors read the result. It belongs to the operations side of startup finance and leans on the same revenue base as ARR vs MRR.

What burn rate and runway mean

Burn rate is the rate at which a startup spends its venture capital to cover overhead before positive cash flow comes from operations⁴. It is a common metric because it shows how long a company can keep operating before it becomes profitable or needs more financing⁴. Runway is the companion: the number of months a company can continue operating before it runs out of cash, assuming current spending levels stay the same⁷. The two go hand in hand: together they dictate how long a start-up has until its current operations can no longer be sustained⁶.

Gross burn and net burn

Burn rates can be gross or net⁴. Gross burn is the total money spent each month, while net burn is the money spent minus any revenue⁴. Net burn is the one that matters for runway: the formula for net burn is total monthly cash expenditures minus total monthly revenues⁴. Gross burn still earns its place on a dashboard, because it shows what the company would lose if revenue stopped.

One condition limits the whole idea. Once a startup earns more than it spends, burn rate is meaningless, and as a metric it only helps startups whose expenses still exceed revenue⁵.

The cash runway formula

The formula for cash runway is the amount of cash on hand divided by the burn rate⁶. Pilot writes it as total cash held divided by average burn rate, which gives the number of months before the money runs out⁵. The result assumes expenses and revenue stay constant and that no new funding arrives⁵.

Using an average matters. Pilot recommends the average burn rate over a run of months instead of one month’s figure, because it gives the more accurate answer⁵.

Including investor funding

Burn measured from cash balances has a trap. Say a startup just closed a round: its burn rate might show as negative for that month, because it appears to be gaining money overall⁵. Founders who want burn regardless of ongoing funding should first subtract recent funding from total cash⁵. That version shows how close the company is to recouping expenses from revenue-generating activities alone, and it is the first step in knowing how long the business would last if fundraising stopped⁵.

Worked example (our arithmetic): the month the round closes at Marlow (method from⁵)

The first figure makes it look as though Marlow gained over a million dollars. The second shows the $80,000 it lost, which is what happened operationally.

How to calculate runway

1. Find cash and revenue. The easiest place to find the inputs is the cash flow statement⁵.
2. Work out net burn for each recent month. Subtract each month's cash balance from the previous month's, and take out any funding that arrived⁵.
3. Average the months. Add the monthly burn rates and divide by the number of months⁵.
4. Divide. Today's cash over the average net burn is runway in months^{5, 6}.
5. Compare it with the plan. Runway needs to be read against how long it will take to secure more funding or earn enough revenue to offset expenses⁵.

Published examples keep the arithmetic short. Wall Street Prep’s start-up has $200,000 in cash, monthly cash sales of $50,000 and monthly cash expenses of $30,000, so the net burn rate is $20,000 per month and the implied runway is 10 months⁶. Corporate Finance Institute’s startup has $250,000 in the bank, spends $90,000 a month and brings in $20,000, so it will likely run out of cash in 3.6 months unless it raises capital soon⁷. Pilot’s example has $150,000 now and $200,000 a month earlier, so the startup has only 3 months of cash⁵.

Marlow, month 0 to month 6

Marlow’s plan at the close of the round is a rate of spending that the seed money can carry for a long time. Gross burn is $95,000 a month and revenue is $15,000, so net burn is $80,000 and runway is fifteen months.

Worked example (our arithmetic): Marlow’s runway at two dates (formula from⁶ and⁴)

Runway fell by nine months over a period of six, and the table shows where the other three went. Six months of spending took it from 15.0 to 9.0, which is simply the clock. The extra hiring took it from 9.0 to 6.0. Revenue doubled in the same window and still did not offset the new payroll.

The two lines in the chart are the whole case for tracking runway monthly. They are identical for six months and the gap opens only when burn changes, which is exactly when the old plan stops being a good guide.

How startups use burn rate

Burn rate tells a startup where the money goes, which parts of the business use cash too quickly, and where to cut so spending focuses on growth⁴. It informs fundraising: a startup with a shorter runway may face valuation pressure during a raise, because the risk of cash depletion is higher⁴. It also shapes planning. Founders must estimate projected runway to time when to begin raising interest from investors for the next round⁶.

What counts as a normal burn depends on the business. Startups in transportation, aviation and aerospace typically have high burn rates, because the work needs heavy spending on research and development, hardware and labor⁴. Software startups that only need a few developers can keep their burn rate low⁴. Funding model matters too: VC-backed startups often show high burn from prioritizing growth over profitability, while bootstrapped startups tend to be more cost-conscious⁴. Burn also moves with the stage. At seed, revenue is often negligible, so even modest spending can be a high burn relative to reserves, and at Series A the burn typically increases as the company invests in hiring, marketing, sales and product development⁴.

Stripe’s reproduction of the OpenView 2023 SaaS Benchmarks Report gives a sense of scale for software companies. Median monthly burn was $50,000 for companies under $1 million of ARR, $175,000 for $1 million to $5 million, $175,000 for $5 million to $20 million, $113,000 for $20 million to $50 million and $175,000 above $50 million⁴. Stripe’s page does not state the survey sample, so treat the figures as a rough shape, not a target.

How investors and lenders read it

Investors look at burn rate to work out how long a startup can keep going before it needs more money⁴. A high burn rate might be justifiable in the context of swift growth and market capture, but if growth metrics are also low it could signal a flawed business model⁴. Lenders read it too, and the 10-K of TriplePoint Venture Growth BDC, a venture lender, shows how. One of its criteria for a borrower is a balanced financial condition, typically with 12 months or more of operating cash runway based on projected cash burn, or a path to profitability over a three- to five-year period from the date of investment². It also looks for upcoming milestones that its investment can help provide operating cash runway to reach². In its monitoring, the key topics reviewed include the timing and status of the next equity financing round, cash balance and burn rate, financial and operational progress, and covenant adherence².

That list is useful as a checklist. A founder who can state cash balance, burn rate, the next financing’s timing and progress against milestones is answering the questions a professional lender asks every quarter.

A word on publishing the number. If a public company reports a burn or runway figure as a key metric, the SEC’s guidance on key performance indicators asks for a clear definition of the metric and how it is calculated³. It also asks for a statement of why the metric is useful to investors, and whether to recast prior metrics when the method changes³. A private company reporting to a board can apply the same three tests.

How much runway is enough?

There is no universal answer, and each source frames it differently. In many cases companies aim for at least 6-12 months of runway, which gives the team time to hit key milestones, adjust course or raise new funding without last-minute pressure⁷. Corporate Finance Institute cites a 2024 survey of 110 venture capitalists, in which a majority (53.7%) advised portfolio companies to maintain 6-12 months of runway before their next raise, while 29.6% recommended more than 18 months⁷. The venture lender above looks for 12 months or more².

Early-stage startups may get by with a shorter runway if they are close to launching or fundraising⁷. Pilot’s version is blunter: if a company has three months of runway but its product will not launch for another six months, it clearly does not have enough⁵. Whether runway is enough depends on how long it will take to secure more funding or earn enough revenue to offset expenses⁵.

The editors’ reading of the spread: 6-12 months is a floor for planning⁷, and the lender’s 12 months or more is a floor for being financeable². Neither number accounts for how long a raise really takes, which is the reason to start the process while runway still exceeds it.

Default alive or default dead

Paul Graham’s 2015 essay puts the question differently. Assuming expenses stay constant and revenue grows as it has over recent months, does the company reach profitability on the money it has left⁸? If so, it is default alive; if not, default dead. He observed that half the founders he talked to did not know which they were⁸. The reason the answer matters is that the rest of the conversation depends on it⁸.

His warning is the fatal pinch: default dead, plus slow growth, plus not enough time to fix it⁸. A common route into it is to assume that raising more money will be easy, an assumption that is often false, and the more a company depends on it, the falser it becomes⁸. If revenue growth is steep, say over 5x a year, a company can start to count on investor interest even when unprofitable⁸. Fundraising should still be only a plan A, with a written plan B and the date when the company would switch to it⁸.

Worked example (our arithmetic): Marlow at month 6, with gross burn held at $150,000 and revenue growing from $30,000 a month (net burn $120,000 at flat revenue, from the table above)

Growth helps only a little because the runway is short: the revenue gap is $120,000 a month and a few months of compounding does not close it. Marlow is default dead on any growth rate in the table, and the only open questions are how fast to change burn and how soon to raise.

The going-concern test: one year

Auditors and boards apply a harder version of the same look-ahead. Under the going-concern update from FASB, management evaluates in each annual and interim reporting period whether conditions or events, taken together, raise substantial doubt about the company’s ability to continue as a going concern within one year after the financial statements are issued¹. Substantial doubt exists when it is probable that the company will be unable to meet its obligations as they become due within that year¹. The evaluation rests on conditions and events that are known and reasonably knowable at the issue date¹.

Management’s plans count only partly. Their mitigating effect is considered only to the extent that it is probable that the plans will be effectively implemented, and probable that they will mitigate the conditions that raise substantial doubt¹. If substantial doubt is not alleviated, the footnotes must say so¹.

Read against Marlow, the test is a hard edge. At month 6 the company has 6.0 months of runway on current burn. The accounting question looks twelve months out from the date the statements are issued, so a runway well short of a year, with no raise probable enough to count, is the kind of condition management would have to weigh and possibly disclose. That is a simplification: the standard looks at obligations as they fall due, not at a runway ratio, and anyone preparing audited statements needs their accountants. The point for operators is that the one-year horizon is not an investor preference. It is how the financial statements are meant to be tested.

Should you reduce your burn rate?

Not automatically. Many founders are quick to assume they should reduce burn, but it depends on how the money is spent and what it does for the company; spending on top engineers, salespeople and marketers can be money well spent⁵. The cuts worth making are the ones that buy nothing, such as subscriptions to tools the team does not use⁵.

Where cuts or timing changes are needed, the published options are practical.

• Hire strategically. Prioritize roles that contribute directly to growth or revenue, delay nonessential hires and consider part-time or contract positions⁴. Paul Graham puts it more strongly: hiring too fast is by far the biggest killer of startups that raise money⁸.
• Review spending. Regularly review expenses and assess the value received⁴. Start with discretionary items that do not directly affect operations⁷.
• Raise revenue. Finding quicker paths to market and improving sales processes can balance out the burn rate and extend runway⁴.
• Speed up collections. This does not reduce burn, but it improves cash timing, which extends runway⁷.
• Forecast. Assess future scenarios to prepare for cash shortfalls⁴, and run sensitivity analysis on hires, fundraising delays and pricing changes⁷.
• Raise early. Secure capital before it is needed, to avoid raising under less favorable terms⁴.

Worked example (our arithmetic): Marlow’s options at month 6 (formula from⁶)

Pausing the hires buys two months. It does not turn Marlow default alive, which is why the realistic plan combines the pause with an early raise, started while the 8.0 months still leave room for the process. Hiring too fast also features in a common way startups die, as Paul Graham lays it out: moderately appealing product, decent early growth, an easy first round, a hiring spree that does not produce growth, then high expenses and slow growth that make the company unappealing to investors⁸.

What to track every month

Keep the habit small. Record cash, gross burn, revenue, net burn and runway in the same place each month, using the same definitions, and keep the average burn alongside the single month⁵. Add the date of the next financing and the milestone it is meant to fund, the pair a venture lender reviews every quarter². The metrics that tie most closely to burn are covered elsewhere on this site: CAC payback period shows how long acquisition spend takes to come back, and SaaS churn rate shows how fast the revenue base leaks. How a priced round or a convertible instrument adds to cash is laid out in how venture rounds work.