Burn Rate

Young companies often earn less than they spend in the beginning. They pay salaries, rent, and advertising, even though hardly any revenue is coming in. The money for this usually comes from investors who got in earlier. The burn rate measures how much of this money disappears every month. If someone says “the burn rate is two million euros,” then the bank account shrinks by two million every month. The term comes from English and literally means “rate of burning.”

What the number says about a company’s life expectancy

A much more important number can be calculated from the burn rate: the remaining time. You divide the money in the account by the monthly burn rate. Whoever has 24 million euros and burns two million per month gets twelve months. This period is called runway in the startup world. If the runway is too short, the plane can no longer take off.

That’s why the burn rate is the central figure in conversations with investors. It determines when a company needs the next round of funding. Rule of thumb in the industry: you should start looking for new money at least six months before the end of the runway. Those who wait too long negotiate from a position of weakness. Investors then know that the company has no alternative and push the price down.

A high burn rate is not automatically bad, however. What matters is what the money accomplishes. If revenue grows quickly as a result, the spending is considered an investment in the future. If growth fails to materialize, it’s simply a loss.

Gross, net, and the tricks in the calculation

Two variants are distinguished. Gross burn counts only expenses: everything that leaves the account. Net burn subtracts revenue from that and is thus the number that really counts. A company with five million in expenses and three million in revenue has a net burn of two million.

At AI companies, expenses weigh particularly heavily. The biggest items are usually computing power and personnel. Training a large language model costs millions in compute time at third-party data centers. On top of that come top salaries for experts who are scarce worldwide. That’s why you read about burn rates at AI companies that used to only occur at industrial conglomerates.

A common misconception: the burn rate is not the same as the loss on the balance sheet. The burn rate only looks at actual cash flows. Accounting items like depreciation don’t cost any cash and don’t show up in it. Conversely, a large advance payment can distort a single month’s burn rate without anything actually changing in the business.

Burn rate in headlines about AI startups

In business news, you encounter the term almost always in connection with startups. Typical phrasings are “the company burns 30 million dollars every month” or “the runway lasts until the end of 2026.” Such figures often come from leaked internal documents, since companies rarely disclose them voluntarily. If a newspaper reports on it, that’s usually a signal of pressure behind the scenes.

This becomes especially visible with the major AI providers. Companies like OpenAI or Anthropic generate billions in revenue and still spend significantly more. Their burn rate is exactly the reason why they always need new funding rounds. Critics see this as a bubble, proponents as a necessary initial investment.

Waves of layoffs can also be explained with the term. If a company cuts jobs or projects, it thereby lowers its burn rate and extends the runway. In the industry, this is called “extend the runway.” For employees, the same number thus means something completely different than it does for investors.