This is one interesting analysis by Fred Wilson in his AVC column posted in 2017. What burn rate is acceptable and sustainable? Understandably the discussion with founders and boards could be emotional at best when discussing burn rate. All companies and their backers want to get to the Unicorn status as soon as possible and no spend is enough to get there.
Fred Wilson argues otherwise. And quite rightly so. And he started with the Rule of 40 which makes a good correlation between Revenue, Growth and operating losses. This is also not enough for businesses that are not exactly a SAAS business.
The column states that the relation between the burn and value created in a year should be in the range of 3 to 5x. So if a company adds an additional value of $10mn during a year, their burn should not be greater than $3mn and ideally should be around $2mn. One can take many paths to figure the value added – either triggered by a new investment round, which is easy or through revenue multiples which are essentially linked to performances of Public companies.
This is an interesting one to add to the bunch of ideas around the Rule of 40 collection.
