High-Growth Burn Rates: Am I The Only Entrepreneur Spending This Much?

As much as high-growth startups look alike, the industry they operate in or the stage of development they are facing are major influencers on the amount of money...


Much has been said about startups and their respective burn rates (i.e., cash spent per month), yet it’s hard to find articles that discuss aggregated industry or development stage data. As much as high-growth startups look alike, the industry they operate in or the stage of development they are facing are major influencers on the amount of money a company “burns” on a monthly basis.

By harnessing Equidam data, we have been able to compile insights into the average company burn rate by development stage and by industry.

If you are an entrepreneur, founder or investor wondering: “Is this company wasting money?” or “Are we the only one spending this much?” this data aims to help you gain more direction into operations and cash flow.

 

What Influences Burn Rate?

“Burn rate refers to the rate at which a company uses up its supply of cash over time. 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. Analysis of cash consumption tells investors whether a company is self sustaining, and signals the need for future financing. Be careful around companies with high cash burn rates. These investments can turn to ashes.” (Source: Investopedia)

Stage of development and industry influence a company’s burn rate. By aggregating our data, we found consistent differences in the burn rate of companies. We then categorized burn rates by industry (i.e., 10 macro industries in which companies operate) and development stage (i.e., 6 development stages ranging from idea to expansion stage). Taking it a step further, we investigated future expected burn rates – what the company estimates to spend in the future.

For instance, when looking at Hi-Tech, Transport & Machinery, considering companies across all stages of development, it turns out that companies in this category burned on average €181k (i.e., $230k) per month in 2013. Entertainment Media and Marketing companies burned only €16k (i.e., $20k).

It is interesting to note that our findings are in line with past burn rate estimates featured in articles, like ‘How Much Cash Should Your Startup Burn?’ by Redpoint Ventures VC Tomasz Tonguz and ‘What is the Right Burn Rate at a Startup Company?’ by Upfront Ventures VC Mark Suster.

 

Burn Rates for Expansion-Stage Companies

Based on internal Equidam data, the average company in expansion-stage forecasts a monthly burn rate of €1.6m (i.e., an estimated $2M) three years from now. This implies that, if expansion continues, these companies are on a high-speed train to large revenues and even larger costs.

Younger and less established companies forecast, of course, less monthly costs three years from now. For example, idea-stage and MVP-stage companies forecast an average burn rate of approximately €108k (i.e., $135k) per month in three years. This lower burn rate is in line with the expectations of these companies and the fact that growing a company takes time.

 

These Industries Signal Highest Burn Rate Forecasts

Looking at the data by industry, three years from now companies that will have the highest burn rate are those operating in the Real Estate and Engineering industries, respectively burning about €1.5m per month, according to our forecasts.

On the low side, we find Creative companies expect a stable burn rate of about €45k (i.e., $56k) per month on average, which is probably due to the fact that these companies require less capital investment.

All in all, the data reported by VCs, Tomasz Tonguz and Mark Suster, are in line with what we, at Equidam, found. Note: This report is calculated on European data. Different costs and growth potentials are expected from various global startups.

 

This article has been edited and condensed.

 

Daniel Faloppa is the Co-founder of Equidam, a cloud technology and financial services company providing tools for SME evaluations; helping both entrepreneurs and professionals gain access to better data analysis tools. Following the cloud revolution that occurred in the accounting and bookkeeping industry, Equidam is bringing the world of financial analysis to the cloud. Faloppa is passionate about finance, technology and startups. He completed a BSc in Economics and Finance at the University of Padova (Italy); graduating cum laude from the MSc Finance & Investments at the Rotterdam School of Management. Faloppa’s goal is to help entrepreneurs succeed and participate in the growth of the highest potential ideas. Connect with @Equidamtweets on Twitter.

 

 

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