As the developer of Business Plan Quick Builder, I am often asked about business burn rates and the early stages of business startup. Your ‘burn rate’ is how quickly your startup uses the money invested to get things going. The term became popular in internet startups in the 2000s that raised large sums through venture capital and IPO, then invested heavily in infrastructure (offices, staff, marketing) to scale quickly for the expected exponential growth in demand. Typically people would say “business X has a burn rate of $100,000 per month, at this rate it needs to scale and turn profit in 9 months”. Many businesses raised large sums and just ‘burnt it’ scaling and not achieving demand.
The heady days of the internet bubble are one thing, but what do they have to do with your startup in 2020? Well, the same notion of burn rate applies equally to a small startup as it does to a company stretching for an IPO. Many startups get carried away with looking like a professional business, and invest in infrastructure that would be best left until demand has grown and scale requires extra internal capacity. As an entrepreneur, consider carefully all investment decisions and reduce outgoing to reduce the burn rate, increase longevity on the current cash and reduce risk. Classic examples that cause burn rates to increase include:
- getting an office or premises when you could start from home
- Taking on fulltime staff when yourself, family or part-time staff could cope for now
- Spending loads on a website or brand where a homegrown template site would do for now
- Employing consultants and alike
- Leasing new cars, vans etc
- Assuming you need a high street presence where online might work
- Taking on leases or loans for bits of kit (computers, tools, etc) where rental, loan or some old bit of kit would do for now
This can all be summed up as the trap of becoming a “little big business”, desperate to look professional, but not yet having the cash through demand to pay for the infrastructure. Do not fall into this trap, keep infrastructure costs low, keep the burn rate low and give yourself time to discover your business model and sustainable demand, then invest in infrastructure.
