Understanding Burn Rate and Runway and Their Impact on Alternatives

There’s a lot of jargon in the title of this post, so let me get to my point quickly.  Burn rate typically refers to the monthly outflow of cash necessary (or at least customary) for your business to operate.  Runway is simply the amount of time or the distance that your current cash and projected revenues can take you before your business “crashes and burns.”

Every business has a burn rate and a runway, although healthy businesses – particularly those not looking for an exit transaction – don’t generally spend a lot of time looking at these rather crude measurements of performance/viability.  For them, analyzing burn rate really only means carefully reviewing the company’s business plan/budget, projections and pipeline of new business, tracking the company’s income statement, controlling expenses, etc.  Businesses looking for an exit (or even those just looking for additional investors), however, CANNOT afford to lose track of these factors, because doing so can dramatically impact valuation, limit alternatives, and ultimately determine the viability of the company as a going concern.

So, why is this rather simple subject worthy of a blog post?  Because again and again, I see businesses with valuable assets, technology, etc. that simply “speed down the road toward the exit ramp” (i.e., a sale, merger, IPO or other transaction) only to find that there’s not enough “fuel in the tank” (i.e., operating cash) to get there.  And what does that mean?  If you’ll pardon my taking the road-trip analogy even further – that means you may be the company with the $300,000 Lamborghini that’s out of gas by the side of the road in the middle of the desert where the sale price for gas is $100/gallon; or worse yet, where there’s no one who will sell you gas at any price, but someone who will buy your car (i.e., business) for 1/10th its actual value; or in the very worst situation, where no one will even buy your car, but instead, they’ll scavenge and loot it once you’re gone.

Don’t be the company that loses track of burn rate or runway!

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