The appendix slides are not part of your core pitch deck. It’s hugely beneficial to prepare them as it allows the founder (or presenter) to have clarity while answering questions. Also, investors like founders who come ready to answer the questions. We work with every client through the appendix slides just like how we work with the core slides. Note: You can have unlimited number of appendix slides. What goes inside your appendix section depends heavily on your startup and your business modal.
Simply put, burn rate is just a quick way to measure how fast your startup is losing cash. It’s the rate of negative cash flow, usually quoted as a monthly rate, but in some crisis situations, it might be measured in weeks or even days.
Runway is how long your business will be able to stay open at that current burn rate. It shows how long your company can last if you never make a cent again (i.e. worst case scenario).
“[Burn rate] is what signals to existing investors how quickly their teams need to be fundraising and the level of risk the company is facing. It also signals to potential new investors both how quickly you need to raise (i.e. you have less leverage if you’re in a rush) and how much cash you’ll need if they fund you.”Mark Suster, Managing Partner at Upfront Ventures
When an investor asks for your burn rate, they are wondering if your startup can survive till they can make an informed decision about investing in your startup.
Another reason might be to understand how long you have till you need to raise another round. Most investors do a small investment (say, $1mil) and if you are doing well after the investment, they will double down with more money (say, $5mil) through a follow-on round. So knowing how long your current raise will last is key to them.
How to calculate your burn rate: Start with looking at your cash balance. Divide the amount of cash you have left by how much you spend every month (i.e., the cash you burn).
If you burn $25,000 per month and have $100,000 left in reserves, you have four months of runway left.
Net vs Gross burn rate: If you spend $500,000 per year then your monthly gross burn (i.e., the total money spent) is $41,666.67: $500,000 ÷ 12 months = $41,666.67. If you spend $500,000 per year but you generate $25,000 per month in revenue then your monthly net burn (i.e., the amount of money lost once earnings have been subtracted) is $16,666.67: $500,000 – ($25,000 x 12 months) ÷ 12 months = $16,666.67.
“Assuming a constant burn rate can be very dangerous. Always know if your burn rate is going up or down and include that fact in your analysis.”Fred Wilson, Partner at Union Square Ventures
Keep in mind that if you less that 6 months of runway left, you might not have that much leverage to negotiate a good valuation from your investors. The more volatile your market is (fintech, blockchain for example), the longer your runaway needs to be.
If your burn rate is unusually high, investors might ask how you are planning to reduce your burn (It’s okay if you are not worried about your runway, just make sure that you convince the investors that you will have no problem raising future rounds to sustain your company).
Some good answers for this question are:
- To hire better or to outsource some current in house functions such as accounting, finance, human resources, corporate governance, etc.
- Cutting time to market is another way to reduce your burn rate. If something takes longer to reach the customers, you are just burning money while you are producing and housing it.
- Lowering development costs by moving your development team to a cheaper market is acceptable. Do have a good idea on how you plan to execute the transition.
“It’s OK if you want to spend money to be aggressive for growth or speed. The thing that is not OK is if the plans change or environment changes, you should be able to reach profitability on the money you have. What is OK is to spend money for productivity. What is not OK is just to light money on fire.”Sam Altman, President of Y Combinator