Burn rate and runway, explained properly

Gross burn is everything leaving the account: payroll, servers, rent, tools, marketing spend, contractors. Net burn subtracts incoming revenue from that figure. A company spending four hundred thousand a month while collecting three hundred thousand has a gross burn of four hundred thousand and a net burn of one hundred thousand.

The distinction matters because the two numbers respond differently to growth. Net burn can shrink toward zero purely by selling more, without cutting anything. Gross burn only falls when you actually spend less. Boards ask about both, and a founder who quotes only the flattering one is usually about to be asked for the other.

Divide cash on hand by net burn and you get runway. Three million in the bank against a two hundred thousand monthly net burn is fifteen months. That figure, not the balance, is what should drive decisions, because it converts an abstract cushion into a deadline.

The convention is that fundraising takes three to six months from first meeting to money in the account, and it takes longer in a bad market. A company with nine months of runway is already inside the window where it must start raising. A company with four months is negotiating from a position everyone in the room can see.

In most software companies, salaries and the costs attached to them account for the large majority of burn. Servers, tools, and rent feel visible and controllable, which is why founders cut them first, but trimming a cloud bill rarely changes the runway calculation by more than a few weeks.

This is also why hiring is the highest-stakes decision a founder repeatedly makes. A new engineer is not a one-time cost — it is a permanent increase in the monthly denominator of the runway equation, and it takes months before that person's output shows up in revenue.

When runway runs out before a round closes, the usual instrument is a bridge: a short-term round, often from existing investors, that carries the company to the next milestone. Bridges are expensive in dilution and in signalling, because the terms reflect the fact that the company had no alternative.

In Garage to IPO, hitting a zero cash balance opens a thirty-day emergency window rather than ending the run immediately. You can accept punishing bridge terms, cut costs hard, or gamble on revenue arriving in time. It is deliberately an unpleasant set of choices, because that is what the real version feels like.