The Quick Answer
Burn rate is the monthly rate at which a startup spends cash, and runway is the number of months the company can operate before running out of money.
Burn rate is a cash flow metric that tells you how fast your company is consuming its cash reserves. Runway translates that rate into a survival timeline.
The core formulas are:
Gross Burn Rate = Total Monthly Operating Expenses
Net Burn Rate = Monthly Operating Expenses - Monthly Revenue
Runway (months) = Cash Balance / Net Burn Rate
If you have $600,000 in the bank and your net burn is $60,000 per month, your runway is 10 months. That means you have 10 months to either raise more capital, increase revenue, or cut costs -- or the company runs out of cash.
Gross Burn vs. Net Burn
These two numbers tell different stories, and both matter.
Gross Burn Rate
Gross burn is your total monthly spending -- salaries, rent, software, marketing, hosting, everything. It does not account for revenue at all.
Gross Burn Rate = Total Monthly Expenses
This number tells you the full cost of keeping the company running. It is the number that matters if revenue suddenly drops to zero (a real scenario for early-stage companies).
Net Burn Rate
Net burn subtracts whatever revenue you bring in from your expenses. It represents the actual cash drain each month.
Net Burn Rate = Monthly Expenses - Monthly Revenue
Net burn is the number most founders and investors use for runway calculations because it reflects the real rate of cash depletion.
If your expenses are $80,000/month and revenue is $20,000/month, your gross burn is $80,000 and your net burn is $60,000. The $20,000 in revenue is slowing the cash drain by 25%.
Worked Example 1: Early Revenue Startup
A SaaS startup has the following financials:
| Item | Amount |
|---|---|
| Cash in bank | $600,000 |
| Monthly expenses | $80,000 |
| Monthly revenue | $20,000 |
Gross Burn Rate = $80,000
Net Burn Rate = $80,000 - $20,000 = $60,000
Runway = $600,000 / $60,000 = 10 months
Result: The company has 10 months before cash hits zero at the current rate. Using gross burn, runway would be only 7.5 months -- that is the worst-case scenario if all revenue disappeared.
Worked Example 2: Pre-Revenue Startup
A pre-revenue startup just closed a seed round:
| Item | Amount |
|---|---|
| Cash in bank | $1,200,000 |
| Monthly expenses | $95,000 |
| Monthly revenue | $0 |
Gross Burn Rate = $95,000
Net Burn Rate = $95,000 (same as gross, since revenue is zero)
Runway = $1,200,000 / $95,000 = 12.6 months
Result: 12.6 months of runway. This is in the healthy range but on the lower end. The company needs to either generate revenue or begin fundraising within 4-6 months to avoid running out of time.
How Revenue Growth Extends Runway
Static runway assumes your net burn stays constant. But if revenue is growing, net burn shrinks each month, and your actual runway is longer than the simple formula suggests.
Consider the startup from Example 1 ($600,000 cash, $80,000 expenses, $20,000 revenue) with revenue growing by $5,000 per month:
| Month | Revenue | Net Burn | Cash Remaining |
|---|---|---|---|
| 1 | $20,000 | $60,000 | $540,000 |
| 2 | $25,000 | $55,000 | $485,000 |
| 3 | $30,000 | $50,000 | $435,000 |
| 4 | $35,000 | $45,000 | $390,000 |
| 5 | $40,000 | $40,000 | $350,000 |
| 6 | $45,000 | $35,000 | $315,000 |
| 7 | $50,000 | $30,000 | $285,000 |
| 8 | $55,000 | $25,000 | $260,000 |
| 9 | $60,000 | $20,000 | $240,000 |
| 10 | $65,000 | $15,000 | $225,000 |
| 11 | $70,000 | $10,000 | $215,000 |
| 12 | $75,000 | $5,000 | $210,000 |
| 13 | $80,000 | $0 | $210,000 |
With $5,000/month revenue growth, the company becomes default alive at month 13 when revenue matches expenses. Static runway said 10 months; actual runway is indefinite because the company reaches profitability with $210,000 still in the bank.
This is exactly the analysis Paul Graham describes in his essay Default Alive or Default Dead -- the most important question a startup can answer about its own survival.
Runway Benchmarks
These guidelines come from Y Combinator's startup school and common venture capital expectations:
| Runway Remaining | Status | Action |
|---|---|---|
| 18+ months | Healthy | Focus on growth and milestones |
| 12-18 months | Good | Plan next fundraise, hit key metrics |
| 6-12 months | Caution | Actively fundraising or cutting costs |
| 3-6 months | Urgent | Emergency measures, bridge rounds |
| Under 3 months | Critical | Survival mode, explore all options |
The standard advice is to raise enough capital for 18-24 months of runway at your planned burn rate. This gives you enough time to hit meaningful milestones before needing to raise again.
When to Start Fundraising
Fundraising takes time. According to data from DocSend's fundraising research, the average seed round takes about 12-16 weeks from first pitch to close. Series A and beyond can take 3-6 months or longer.
The practical rule: start fundraising when you have 6-9 months of runway remaining.
Here is the math:
- Fundraising takes 3-6 months on average
- You need 1-2 months of buffer for unexpected delays
- Starting at 6-9 months gives you enough cushion to negotiate from a position of relative strength
If you wait until you have 3 months of runway, investors know you are desperate. Desperation destroys negotiating leverage and leads to unfavorable terms -- or worse, no deal at all.
What Makes Up a Typical Startup Burn
Understanding where the money goes helps identify where to cut if needed. For most tech startups, the breakdown looks roughly like this:
| Category | Typical % of Burn |
|---|---|
| Salaries and benefits | 60-80% |
| Office / co-working space | 5-10% |
| Software and infrastructure | 5-10% |
| Marketing and sales | 5-15% |
| Legal, accounting, insurance | 2-5% |
| Everything else | 3-8% |
People are by far the largest expense. This is why layoffs, hiring freezes, and salary reductions are the primary levers when a company needs to extend runway quickly.
How to Reduce Burn Rate
When runway gets short, there are several options in order of increasing severity:
- Cut non-essential software and services -- audit every subscription. Companies commonly discover $2,000-5,000/month in unused or redundant tools.
- Freeze hiring -- unfilled roles are the easiest "cuts" because nobody loses a job.
- Renegotiate contracts -- landlords, vendors, and service providers will often prefer a reduced rate over losing a customer entirely.
- Reduce marketing spend -- cut campaigns with unclear ROI. Keep what directly drives revenue.
- Implement salary reductions -- temporary pay cuts across the board, often 10-20%, sometimes with equity compensation.
- Layoffs -- the hardest option, but sometimes the only way to extend runway enough to survive.
A 20% reduction in burn rate on $100,000/month saves $20,000/month and can extend a 6-month runway to 7.5 months -- potentially the difference between closing a funding round and shutting down.
Default Alive vs. Default Dead
Paul Graham's framework is simple: project your current revenue growth rate forward against your current expenses. If the lines cross (revenue exceeds expenses) before your cash runs out, you are default alive. If they do not, you are default dead.
Default dead does not mean the company will die. It means that without a change -- raising money, cutting costs, or accelerating growth -- it will die. Knowing which side you are on determines how urgently you need to act.
The calculation requires honest assumptions about growth rates. Founders tend to be optimistic. Use your trailing 3-month average growth rate, not your best month.
FAQ
What is a good burn rate for a startup?
There is no single good burn rate -- it depends on your stage, runway, and growth. The real question is whether your burn rate gives you enough runway to hit your next milestone. Most investors want to see at least 12-18 months of runway. If your burn gives you that, and spending is driving measurable progress, the rate is reasonable.
How much runway should a startup have?
12-18 months of runway is considered healthy. Below 6 months is an urgent situation requiring immediate fundraising or cost cuts. Between 6-12 months, you should be actively planning your next raise or path to profitability.
What is the difference between gross and net burn rate?
Gross burn rate is your total monthly expenses regardless of revenue. Net burn rate subtracts your monthly revenue from expenses, showing the actual cash you lose each month. A startup spending $100,000/month with $30,000/month in revenue has a gross burn of $100,000 and a net burn of $70,000.
How do you calculate runway?
Runway = Cash Balance / Net Monthly Burn Rate. If you have $900,000 in the bank and your net burn is $75,000 per month, your runway is 12 months. Use net burn (expenses minus revenue) for the most accurate figure.
When should a startup start fundraising?
Start fundraising 6-9 months before your runway ends. Fundraising typically takes 3-6 months from first meeting to money in the bank. Starting too late puts you in a desperate position where investors have leverage and terms worsen.
What does default alive mean?
A term coined by Paul Graham. A startup is default alive if, at its current revenue growth rate and current expenses, it will become profitable before running out of cash. Default dead means the company will run out of money before reaching profitability without either raising more capital or cutting costs.
How does revenue growth affect runway?
Revenue growth extends runway because it reduces net burn each month. A startup with $600,000 cash and $60,000 net burn has 10 months of static runway. But if revenue grows $5,000/month, the shrinking net burn extends runway beyond 10 months -- potentially to 14 or more months depending on growth consistency.
Should I include one-time expenses in burn rate?
For ongoing planning, use your recurring monthly burn rate and exclude one-time expenses like equipment purchases or security deposits. However, account for known upcoming one-time costs separately by subtracting them from your cash balance before calculating runway.
What is zero cash date?
Zero cash date is the projected date when your company's bank balance hits zero based on current burn rate. It is the calendar equivalent of runway. If you have 10 months of runway starting in March, your zero cash date is January of the following year.
How can a startup reduce burn rate?
The biggest levers are headcount (typically 60-80% of startup burn), office space, and software subscriptions. Tactical options include renegotiating contracts, switching to remote work, freezing hiring, reducing marketing spend, and cutting non-essential tools. Layoffs are painful but sometimes necessary to survive.
Related Tools
- Burn Rate & Runway Calculator -- Calculate your monthly burn rate and remaining runway
- Burn Rate & Runway Visualizer -- Visualize your cash runway over time with interactive charts
- Unit Economics Calculator -- Understand your per-unit profitability alongside burn analysis