Burn Rate: A Heavy Backpack Will Leave You Short Of Your Goals

It is hard work raising money for an early-stage company, and as the cliché goes once the company is funded, that’s when the work really begins.  Some of the first decisions an entrepreneur makes can be the most important.  It’s a lot like backpacking…

In July 2009, I hiked the Wild River Wilderness area nestled in the White Mountains of Eastern New Hampshire.  This is one trip where I definitely had packed too much; a fact that became abundantly clear to me as my hiking partner and I humped up the 4,833 foot Carter Dome.

I should have realized my pack was too heavy before even leaving the house.  When I tried to sling the pack onto my back, it nearly knocked me over and the shoulder straps came close to tearing off.  Clearly I was trying to bring too much stuff.  Now on the trail, each and every step was a chore and the weight on my back – causing the straps to dig into my shoulders, collarbone, and hips – sapped me of energy faster than was necessary.  By carrying too much equipment, every step along the trail used up my limited strength and energy at a rate that would leave me exhausted far before we would reach our destination.  It is dangerous to hike fatigued, and I was ill prepared for the unexpected.

Packing Smartly? Carrying too much on the trail is no different than burning through cash faster than achieving those milestones needed to raise the next round.

After most of the day hiking in the beautiful sunshine, torrential downpours for the next several days waterlogged everything – I literally had to wring out my sleeping bag before climbing into it at night.  With everything wet, what had been a heavy backpack now became nearly unbearable.    As a result, I was not able to hike as far each day, I had to take more frequent rests, and I was not able to summit all the peaks I had hoped to accomplish.  This is a lot like the burn rate of an early-stage company.

Fred Wilson of Union Square Ventures succinctly defines burn rate as, “the speed at which your cash balance is going down.”  An entrepreneur will want to give himself enough time to make real progress, achieve meaningful milestones, and still have time to pull together the next financing.  The burn rate of your company helps to determine a rough estimate as to how long you have to accomplish these objectives.  Spend too much money each month, and it’s like having a heavy pack that limits how far the company can go.

Funding an early-stage company is a lot like packing for a lengthy hiking trip.  Seed stage funding, for example, is usually not a whole lot of capital and must be allocated strategically, much like carefully choosing what and what not to bring hiking.  There is tremendous pressure on entrepreneurs to choose wisely how the company spends its money and how much money to spend on each budget item, yet still achieve its goals, and do so before the cash runs out.  Generally the goal of seed funding is for the company to demonstrate some critical aspect of its business, de-risking it sufficiently such that an investor is willing to fund the company in a larger round further accelerating the business.

Sometimes difficult choices need to be made.  It would be great to have a larger tent or a more functional stove, but there is not enough real estate in my pack and literally every ounce counts when you are carrying everything twelve miles over some of the most unforgiving terrain.

Burn rate –> Burn out: Rain soaked tent is heavy enough, but notice my dad’s old Army shovel – what was I thinking packing that?

Similarly, it would help an entrepreneur to have additional headcount or more functional office space, but increasing the burn rate leaves the company with less time and flexibility to achieve the goals of the funding round.  All of these decisions have consequences, and like backpacking, once they are made, it is very difficult to make changes late at night, deep in the woods, when it starts raining.

So my advice to entrepreneurial teams that have raised a round of early-stage financing, pack your backpack smartly.  You have a lot of ground to cover over difficult terrain and unexpected challenges will likely surface.  If you have the right resources readily available and are not burdened with extra weight that merely weighs you down, then you are more likely to reach the summit and enjoy the views from the top.

…and remember to bring a compass.