As an investor, I’m often asked what sort of burn rate is appropriate for a growing company. This question seems to come up right after a Series A raise when the startup feels flush with cash, has some level of product/market fit, and is wondering how much and how fast to try to grow.
For SaaS companies in this situation, my rule of thumb for burn guidance is to have a one year ratio of net burn to net new MRR. In other words, if you are growing through $30K of net new MRR, I’d be comfortable as an investor with you burning $360K a month (30,000 x 12 = 360,000). Your $30K of net new MRR pays back this months burn over the next year. Of course it also matters how much cash on hand and runway you have and it matters that you’re still seeing other healthy metrics as a result of that burn over time. This rule of thumb also assumes a reasonable operating margin and healthy limits on churn. So you have to watch those things carefully, as always. At earlier stages, it’s more art than science and of course the ratio makes no sense at all if you have no revenue.
Please be careful if you’re just skimming this post looking to justify a big burn! I’m talking about net new MRR (the amount of MRR you’re ADDING each month, not the current level of MRR or CMRR. If your current MRR is $100K and you’re adding $10k of net new MRR each month, my rule of thumb would only work out to about $120K per month burn. Much lower. Growth rate matters when you’re learning in and stepping on the gas.
I also think this rule of thumb applies to in-revenue companies in the typical Series A to Series B range, and not indefinitely. I’m not sure I’d ever get comfortable with millions in burn per month for a SaaS company (although others have), so apply sanity tests outside the typical Series A to B scenario.
In Bessemer’s wonderful “state of the cloud” report for 2017, slide 35 illustrates this similarly but on an ARR basis. Their “efficiency score” is the ending ARR over the net burn, where ratios > 1 are best.
And, of course, this rule of thumb only applies if I think you’re not close to market saturation. As long as I feel like there’s plenty of room in the market to go get it, then I’m generally comfortable with this rule of thumb. And if you’ve just raised your Series A, presumably you and your investors have that belief!