Once an entrepreneur gets in the throes of the whole capital raising process, one of the terms they hear is burn rate. A lot of times, we get the question, what is burn rate? Well, classically defined, burn rate is the rate at which a company will exhaust its capital base. Let's take an example. Let's say a company has a burn rate of a million dollars per month. That means that they will exhaust a $12-million capital base in a year. Burn rate is synonymous with negative cash flow, and this is important to investors for a couple reasons.
#1, an investor wants to know if the money that they are putting into the company, or potentially putting into the company, I should say, is enough to sustain the company until it can reach positive cash flow.
#2, that is going to give them some indications as to whether or not another round of fundraising is going to be necessary before the company is up and on its own.
Also, investors typically look at companies in light of their ability to reduce their burn rate when revenues do not meet projections. This is important for two reasons as well.
#1, a lack of cash just diverts management attention from the crucial business of running the business, the day to day operations.
#2, a lack of cash severely hamstrings growth necessary to reach positive cash flow and eventually exit. It also prevents the company from taking on new customers.
If an entrepreneur has any questions about burn rate, how to calculate it, and what it really means, I always recommend that they contact us or give us a call at the Capital Match Point. We have seen this a lot. It is a topic we deal with daily, and we would be glad to walk them through it. Because at the end of the day, we are in the business of maximizing our entrepreneur's opportunity to get funded.

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