What do terms like burn rate, runway, and CAC mean for an early-stage startup?

In the early stages of a startup, these metrics act like the dashboard of a car, telling you how fast you’re consuming your resources and how far you can travel before needing more fuel.

Here is a breakdown of those terms:

1. Burn Rate

This is the speed at which your startup spends its cash reserves before it begins generating positive cash flow. It is typically calculated on a monthly basis.

• Gross Burn: The total amount of operating expenses you pay out each month.
• Net Burn: The amount of money you are losing each month (Total expenses minus any incoming revenue).
• Why it matters: It tells you exactly how expensive your current business model is to run.

2. Runway

This refers to how many months your startup can continue to operate given your current cash balance and your net burn rate.

• Formula: Cash Balance ÷ Monthly Net Burn = Months of Runway.
• Example: If you have $100,000 in the bank and you are losing $10,000 per month, you have 10 months of runway.
• Why it matters: It provides a "drop-dead date" for when you will run out of money. Founders use this to time their fundraising efforts or decide when they need to cut costs.

3. CAC (Customer Acquisition Cost)

This is the total cost associated with convincing a potential customer to buy your product or service.

• Formula: (Total Sales and Marketing Expenses) ÷ (Number of New Customers Acquired).
• Why it matters: If your CAC is higher than the amount of profit you make from a single customer over their lifetime (LTV, or Lifetime Value), your business model is not sustainable.

In short: Burn is how fast you spend, Runway is how long you have left, and CAC is how much it costs to grow. Keeping these in balance is essential for survival.