Industry Insights

Crowdfunding - start-ups cash burn and runway

Every start-up needs cash   

Cash is the fuel that gets you going and keeps you going.  So how much cash will your start up need each month to cover team salaries and operating costs? Estimate this accurately and average it on a monthly basis - this is the 'burn rate'

How long can you survive before you need more cash? When will you hit breakeven...or when will you need the next round of funding? Again, calculate this accurately, this is your 'runway’, you don't want to reach the end and miss the take off!

Keep your start-up lean

Every business is different.  For example, some tech start ups, particularly software developers can keep it lean and mean with a burn rate of less than £10k per month. 

This is a great position to be in...if you can create Minimum Viable Product (MVP) with a lean team burning less than £10k per month, then assuming no early revenues you will need circa £150k to provide enough runway to get some traction.

How much runway does your start-up need?

Generally, investors would like to see 12 to 18 months of runway, so if you can operate in the early stages with a burn rate of circa £8k to £12K per month then your start up is positioned nicely to raise a seed round which will fall within the £150k limit of the Seed Enterprise Investment Scheme (SEIS).  

For those who don't know SEIS is one of the UK governments best kept secrets. It provides investors with some amazing tax relief - between 50% and 64%, depending on circumstances. This is a massive incentive for investors and helps them manage downside risk when investing in start ups and early stage businesses.  

If your start-up is an eligible business, then raising capital on a crowdfunding platform could be the ideal way to attract investment from a larger pool of investors - and  provide enough runway to develop MVP and hopefully set the stage to begin generating revenues. 

Give investors confidence in your start-up

The key is to plan the next round of funding well in advance.  Determine milestones that will mitigate risk for future investors. 

These risk mitigating milestones are the ones that, by their very nature, will help you create value in your start-up.  For example, for web based businesses, how many users are you aiming to have by months 3, 6 and 9?  

What critical success factors must you achieve?  Identify them and achieve them.  These milestones will help you achieve a better valuation at the next round of funding. It will give investors confidence in your team and your ability to execute your growth strategy.

Start to raise investment for your company today

Recommendations to manage your burn rate

  1. Develop your project management skills.  Identifying key milestones, setting goals and managing budgets are vital skills. Invest in project management software - check out Project Manager and Basecamp

  2. Pick your advisers carefully. This needs serious consideration. Good advisers can seriously enhance your chances of success!  But remember, budget wisely and appoint wisely.

  3. Build a brilliant team.  Consider paying the right people with equity.  This could be a percentage of future revenues or a stake in the business.  Again, this needs serious consideration.

  4. Consider outsourcing.  If you are developing a software application, consider offering a piece of the action to the developers. This could be a percentage of future revenues or a stake in the business.  Again, this needs serious consideration. It can work well if everyone has the same goal in mind.  If not, then it can really hinder.

  5. Measure and manage.  Review your burn rate every month and manage it on a daily basis.  It's straightforward - income minus expenditure, even easier if you are not revenue generating.  Be realistic about when you will begin to generate revenues.  All start ups want to monetise as early as possible but if you are over optimistic in your forecast then you will underestimate your peak cash requirement and your runway.

Controlling your burn rate and hitting key milestones gives investors confidence.  It demonstrates prudence, efficiency, effectiveness and the ability to execute a plan.  Manage this well and you will be in a strong position when you approach investors for your next round of funding!

As well as a blog series, we have also created an eBook titled 'How to make money through online angel investing'. If you're an investor looking to make your first investment, download this helpful eBook completely free.

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