Blog Feed Post

How to Reduce Startup Burn Rate


With a startup, as well as in any other business, your money is your fuel. When you run out of it, you can find yourself stranded in the middle of nowhere, with no means of sustenance.

According to CBInsights, running out of cash is one of the most common reasons why startups fail: 58 out of over 200 post-mortems listed this as the main cause for their failure. While there are more hazards threatening the existence of your company, such as wrong market fit, pricing, competition, and poor product quality; you can surely avoid running out of funds if you have a proper cash management system in place.

Before we proceed with the tips and strategies for funds management, let’s talk about startup burn rate first.

Defining the Startup Burn Rate

The term “burn rate” typically denotes the “rate at which a new company is spending its venture capital to finance overhead before generating positive cash flow from operations.” In other words, it’s the negative cash flow: the amount of money a company consumes every month to keep its operations going.

Knowing your average burn rate can help you foresee how soon you will run out of money. This can aid you with the development of a contingency plan. Another reason to keep track of your burn rate is that it might have a major impact on your ability to attract any investments at all. If your burn rate grows faster than your anticipated revenue, most of the investors will find it risky to fund your startup.

Read also: Creating an MVP that can get your startup funded

Burn rate is quite easy to calculate, in theory. If you have $100,000 on your account at the beginning of the month and $20,000 at the end of it, your gross burn rate is $80,000.

Gross Burn Rate = Monthly Expenses
However, depending on your monthly revenue, your net burn might differ from gross rate.
Net Burn Rate = Gross Burn Rate – Monthly Revenue

While there have been many speculations about “the right” burn rate for a tech startup, there is no absolute way to calculate it. Every startup is unique: monetization models and revenue levels differ, they have different teams (both in terms of size and costs), and administrative expenses vary. As some startups have reported, their burn rates vary from $2,000 to over $240,000. In case you want to get into details, there is a very insightful article on the subject, posted by Mark Suster, serial entrepreneur and investor.

Regardless of your burn rate, finding ways to reduce it always pays off. Just in case you want to know how to cut your burn rate without putting your startup at risk, here are some useful tips.

Tips for Reducing Your Startup Burn Rate


Hiring a remote development team is a great way to cut unnecessary expenses when building a high quality product that requires a fast time to market. Outsourcing offers a number of benefits:

  • lower cost – Eastern European developers have significantly lower rates, while maintaining the same level of quality, as compared with local US or European developers;
  • reduced administrative burden – you won’t need to worry about an office or equipment as your remote team typically comes fully equipped by the provider;
  • increased flexibility – you can grow your team if needed and add any skills you require.

A dedicated development team is the most beneficial cooperation model when working with an outsourcing company. It proves to be especially efficient for ongoing projects: It offers transparent and predictable budgeting, which allows you to keep track of your burn rate and adjust it if needed.

Go agile

The ability to identify the concepts that won’t work and pivot quickly is crucial for any startup. It is even more so for a startup that wants to reduce its burn rate.

Building an MVP first and testing the waters before going “all in” is a great strategy for avoiding unnecessary expenses that might skyrocket your burn rate.

Moreover, the agile project management approach offers more flexibility in terms of resources management. It allows you to apply lean principles, cut waste in the development process, and thus reduce your burn rate.

Read also: Agile Offshore Software Development: Best Practices

Focus on ROI

As a startup you should only invest in those initiatives and tools that guarantee good ROI. Choose the products that will make your team and processes more efficient.

With all the SaaS tools available for startups, it is difficult to choose 2-3 offerings that will yield the most benefit. However, the truth is, the SaaS model does not always offer the best price for value. Sometimes you might be just fine with a freemium model, especially if you have a small team.

Lots of great startup tools are mostly free, for example Slack, Trello, Skype, Google suite, Gitlab, mobile analytics, (including Google Analytics and Flurry) as well as many marketing tools. In case your startup is already profitable, you should reinvest all your revenue to make your product even better.

Manage your expenses

To be able to reduce your burn rate, you first of all need to keep track of your cash flow, and analyze major expense sources. By knowing exactly where you money goes, you can eliminate those unnecessary expenses and put your funds to better use.

For example, one of the most common startup mistakes is to rent a huge office space next to Uber or Twitter, throw a party every time you ship a minor product release and visit all the events you can find, be it in your city or across the globe. The thing is, to build a successful startup, you don’t always need an office, and parties might only harm your image among the investors. The general rule for a startup is to spend no more that 5% of your budget on things outside of salaries.

Read also: 7 Ways to Reduce App Development Cost

Grow at a rate you can manage

Uncontrolled growth can do more harm to your startup than a lack of growth altogether. While your burn rate identifies your runway (the amount of time you have before you run out of money), any unplanned growth spurt will make your runway shorter. Unless you can get more funds fast, you should be able to control your startup growth rate.

Final word

As they say, if you want a faster car, you don’t always have to invest in your engine. Sometimes you just need better brakes. Similarly, the key to better burn rate management isn’t to raise more money, it’s to cut your expenses.

Launching a startup is hard. We hope these tips will help you manage your burn rate better and avoid running out of money. If you’re interested in outsourcing software development services, contact us and get a free consultation on your project.

Read also:

The post How to Reduce Startup Burn Rate appeared first on Eastern Peak.

Read the original blog entry...

More Stories By Valeriia Timokhina

Valeriia Timokhina is a blog editor and IT manager at Eastern Peak, a top-ranked custom software development company. Founded in 1999, PEAK-System is a leading provider of hardware, software, and services for the mobile and industrial communication sector with emphasis on the field busses CAN and LIN.

Latest Stories
"There's plenty of bandwidth out there but it's never in the right place. So what Cedexis does is uses data to work out the best pathways to get data from the origin to the person who wants to get it," explained Simon Jones, Evangelist and Head of Marketing at Cedexis, in this SYS-CON.tv interview at 21st Cloud Expo, held Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA.
Digital Transformation and Disruption, Amazon Style - What You Can Learn. Chris Kocher is a co-founder of Grey Heron, a management and strategic marketing consulting firm. He has 25+ years in both strategic and hands-on operating experience helping executives and investors build revenues and shareholder value. He has consulted with over 130 companies on innovating with new business models, product strategies and monetization. Chris has held management positions at HP and Symantec in addition to ...
Enterprises have taken advantage of IoT to achieve important revenue and cost advantages. What is less apparent is how incumbent enterprises operating at scale have, following success with IoT, built analytic, operations management and software development capabilities - ranging from autonomous vehicles to manageable robotics installations. They have embraced these capabilities as if they were Silicon Valley startups.
In their session at @ThingsExpo, Shyam Varan Nath, Principal Architect at GE, and Ibrahim Gokcen, who leads GE's advanced IoT analytics, focused on the Internet of Things / Industrial Internet and how to make it operational for business end-users. Learn about the challenges posed by machine and sensor data and how to marry it with enterprise data. They also discussed the tips and tricks to provide the Industrial Internet as an end-user consumable service using Big Data Analytics and Industrial C...
René Bostic is the Technical VP of the IBM Cloud Unit in North America. Enjoying her career with IBM during the modern millennial technological era, she is an expert in cloud computing, DevOps and emerging cloud technologies such as Blockchain. Her strengths and core competencies include a proven record of accomplishments in consensus building at all levels to assess, plan, and implement enterprise and cloud computing solutions. René is a member of the Society of Women Engineers (SWE) and a m...
When talking IoT we often focus on the devices, the sensors, the hardware itself. The new smart appliances, the new smart or self-driving cars (which are amalgamations of many ‘things'). When we are looking at the world of IoT, we should take a step back, look at the big picture. What value are these devices providing. IoT is not about the devices, its about the data consumed and generated. The devices are tools, mechanisms, conduits. This paper discusses the considerations when dealing with the...
DXWordEXPO New York 2018, colocated with CloudEXPO New York 2018 will be held November 11-13, 2018, in New York City. Digital Transformation (DX) is a major focus with the introduction of DXWorldEXPO within the program. Successful transformation requires a laser focus on being data-driven and on using all the tools available that enable transformation if they plan to survive over the long term.
To Really Work for Enterprises, MultiCloud Adoption Requires Far Better and Inclusive Cloud Monitoring and Cost Management … But How? Overwhelmingly, even as enterprises have adopted cloud computing and are expanding to multi-cloud computing, IT leaders remain concerned about how to monitor, manage and control costs across hybrid and multi-cloud deployments. It’s clear that traditional IT monitoring and management approaches, designed after all for on-premises data centers, are falling short in ...
Mobile device usage has increased exponentially during the past several years, as consumers rely on handhelds for everything from news and weather to banking and purchases. What can we expect in the next few years? The way in which we interact with our devices will fundamentally change, as businesses leverage Artificial Intelligence. We already see this taking shape as businesses leverage AI for cost savings and customer responsiveness. This trend will continue, as AI is used for more sophistica...
With privacy often voiced as the primary concern when using cloud based services, SyncriBox was designed to ensure that the software remains completely under the customer's control. Having both the source and destination files remain under the user?s control, there are no privacy or security issues. Since files are synchronized using Syncrify Server, no third party ever sees these files.
"We are an integrator of carrier ethernet and bandwidth to get people to connect to the cloud, to the SaaS providers, and the IaaS providers all on ethernet," explained Paul Mako, CEO & CTO of Massive Networks, in this SYS-CON.tv interview at 21st Cloud Expo, held Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA.
I believe that this may finally be the year that the CIO role ‘crosses the Rubicon,' leaving behind its traditional, IT-focused orientation. But I don't believe that either of the previous predictions of this outcome — fading into oblivion or rising to a business executive level — is correct. Instead, I think this is the year that we will see the role of the CIO transformed into something altogether different.
Cloud-enabled transformation has evolved from cost saving measure to business innovation strategy -- one that combines the cloud with cognitive capabilities to drive market disruption. Learn how you can achieve the insight and agility you need to gain a competitive advantage. Industry-acclaimed CTO and cloud expert, Shankar Kalyana presents. Only the most exceptional IBMers are appointed with the rare distinction of IBM Fellow, the highest technical honor in the company. Shankar has also receive...
"Calligo is a cloud service provider with data privacy at the heart of what we do. We are a typical Infrastructure as a Service cloud provider but it's been designed around data privacy," explained Julian Box, CEO and co-founder of Calligo, in this SYS-CON.tv interview at 21st Cloud Expo, held Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA.
"NetApp is known as a data management leader but we do a lot more than just data management on-prem with the data centers of our customers. We're also big in the hybrid cloud," explained Wes Talbert, Principal Architect at NetApp, in this SYS-CON.tv interview at 21st Cloud Expo, held Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA.