{"schema":"askedwell-answer-v1","url":"https://askedwell.com/pages/what-is/burn-rate","question":"What is burn rate?","short_answer":"Burn rate is how fast a company spends cash, usually measured per month. Gross burn is total monthly cash out; net burn is cash out minus cash in. Net burn is the denominator of runway — current cash ÷ net burn = months of life left. A \"default-alive\" company reaches net burn ≤ 0 before its cash runs out.","long_answer":"**Gross burn vs net burn (the distinction that matters most)**\n\n```\nGross burn = total cash spent per month (all operating costs)\nNet burn   = gross burn − cash received per month (revenue + other inflows)\n```\n\nA startup spending $200k/month with $80k/month in revenue has $200k gross burn and $120k net burn. Net burn is the number that determines survival, because it is what actually drains the bank balance.\n\n**Worked example**\n\nA company holds $1.2M in the bank, spends $250k/month, and brings in $100k/month:\n- Gross burn = $250k\n- Net burn = $150k\n- Runway = $1.2M ÷ $150k = **8 months**\n\n**Default alive vs default dead (Paul Graham)**\n\nThe single most important framing of burn: at your *current* growth rate and burn, do you reach profitability (net burn ≤ 0) before the money runs out?\n- **Default alive** — yes; on current trajectory you become self-sustaining in time.\n- **Default dead** — no; without a new raise or a change, you run out.\n\nThis reframes burn from \"how much are we spending\" to \"are we on a path that ends in survival.\" It is answerable with three numbers: cash, net burn, and growth rate.\n\n**The Burn Multiple (capital efficiency)**\n\n```\nBurn Multiple = Net burn / Net new ARR\n```\n\nPopularized by David Sacks and tracked by Bessemer, it measures how much cash you burn to add a dollar of recurring revenue:\n\n| Burn Multiple | Efficiency |\n|---|---|\n| <1× | Amazing |\n| 1–1.5× | Great |\n| 1.5–2× | Good |\n| 2–3× | Suspect |\n| >3× | Bad (burning a lot to grow a little) |\n\nA burn multiple of 1× means you burned $1 to add $1 of new ARR; 3× means $3 for the same dollar — a sign acquisition or retention is leaking.\n\n**What counts in burn**\n\nEverything that leaves the bank: salaries (usually the biggest line), cloud/infra, rent, software, marketing, contractors, legal. One-time items (a big legal settlement, a hardware purchase) are often excluded to show \"operating burn\" — be explicit about which you mean.\n\n**Why burn is paired with runway**\n\nBurn is meaningless without cash. $150k/month net burn is comfortable on $5M of cash (33 months) and an emergency on $300k (2 months). Burn is the *speed*; runway is the *distance left*. Founders track both together and recalculate after every hiring or pricing change.\n\n**Cross-reference:** see /pages/what-is/runway + /pages/what-is-the-difference-between/burn-and-runway + /pages/what-is/annual-recurring-revenue for the Burn-Multiple denominator.","duration_iso":"PT0M","ranges":[{"condition":"Gross burn","duration":"total monthly cash out (all operating costs)"},{"condition":"Net burn","duration":"gross burn − monthly cash in (the survival number)"},{"condition":"Burn Multiple \"great\"","duration":"net burn ÷ net new ARR ≤ 1.5×"},{"condition":"Burn Multiple \"bad\"","duration":"> 3× (burning a lot to grow a little)"},{"condition":"Runway link","duration":"cash ÷ net burn = months remaining"}],"variables":[{"name":"Revenue","effect":"Higher monthly revenue lowers net burn directly without cutting a single cost"},{"name":"Headcount","effect":"Salaries are usually the largest burn line; hiring is the biggest burn lever"},{"name":"Gross vs net","effect":"Always specify which — gross burn ignores revenue; net burn is what drains cash"},{"name":"Growth rate","effect":"Determines default-alive vs default-dead: fast growth can flip a high-burn company to self-sustaining before cash ends"}],"sources":[{"label":"Paul Graham, \"Default Alive or Default Dead?\"","tier":2,"url":"https://www.paulgraham.com/aord.html","note":"Canonical burn-vs-survival framing for startups"},{"label":"David Sacks, \"The Burn Multiple\"","tier":2,"url":"https://sacks.substack.com/p/the-burn-multiple","note":"Origin of the Burn Multiple capital-efficiency metric"},{"label":"Bessemer Venture Partners \"State of the Cloud\"","tier":1,"url":"https://www.bvp.com/atlas","note":"Burn-Multiple benchmarks across public + private SaaS"},{"label":"Y Combinator Startup Library","tier":2,"url":"https://www.ycombinator.com/library","note":"Practical burn/runway management for early-stage founders"}],"faq":[{"question":"What is the difference between gross burn and net burn?","answer":"Gross burn is total monthly cash spent on operations. Net burn subtracts monthly cash coming in (mostly revenue): net burn = gross burn − revenue. Net burn is the number that actually drains your bank account and the one used to calculate runway. A company can have high gross burn but low net burn if revenue is strong."},{"question":"What is a \"default alive\" company?","answer":"Paul Graham's term for a startup that, at its current growth rate and burn, would reach profitability (net burn ≤ 0) before its cash runs out — without needing another fundraise. \"Default dead\" is the opposite. The test reframes burn from \"how much are we spending\" to \"are we on a trajectory that ends in survival.\""},{"question":"What is a good burn multiple?","answer":"Burn Multiple = net burn ÷ net new ARR. Under 1× is amazing, 1–1.5× is great, 1.5–2× is good, 2–3× is suspect, and over 3× is bad. It tells you how much cash you burn to add one dollar of recurring revenue — a rising burn multiple signals that acquisition or retention is getting less efficient."},{"question":"How do I reduce burn rate?","answer":"Two levers: spend less or earn more. Cutting headcount (usually the biggest line) reduces gross burn fastest; growing revenue reduces NET burn without cutting anything. Because runway = cash ÷ net burn, a revenue increase and a cost cut extend runway identically — but revenue growth also improves the default-alive trajectory."}],"keywords":["burn rate","what is burn rate","gross burn vs net burn","net burn","default alive","burn multiple","startup cash burn"],"category":"business","date_published":"2026-05-29","date_modified":"2026-05-29","license":"CC-BY-4.0","attribution":"https://askedwell.com"}