Burn rate is the speed at which a startup spends cash. Runway is how many months that cash lasts. The formulas take thirty seconds to learn — and yet running out of money remains a top-three cause of startup death, because the thirty-second version hides three ways the model lies to you.
Here are the definitions, the worked math, the 2026 benchmarks by stage, and the five modeling mistakes I see most often on cap tables and board decks — so your runway number is one you can actually bet the company on.
Gross Burn vs Net Burn: The Definitions
Gross burn rate is your total monthly cash outflow — payroll, rent, software, cloud bills, marketing, legal, everything that leaves the bank account. Net burn rate is gross burn minus the cash revenue you collected that month. Runway is your cash balance divided by net burn, expressed in months.
Worked Example
Monthly cash out (gross burn): $250,000
Monthly cash revenue collected: $70,000
Net burn: $250K − $70K = $180,000/month
Cash in bank: $2,700,000
Runway: $2.7M ÷ $180K = 15 months
Two rules keep this honest. First, use cash, not accrual accounting: a signed contract that hasn't paid doesn't reduce burn, and an annual prepay that landed last month isn't recurring. Second, calculate burn as a trailing 3-month average — (cash balance three months ago − cash balance today) ÷ 3 — so one-time items don't distort the picture.
Burn Isn't Flat: Modeling Runway Month by Month
The single-division runway formula assumes burn stays constant. It never does. Revenue grows (or doesn't), hires start, annual renewals land. A real runway model is a month-by-month table. Here's the same company as above, with revenue growing 8% monthly and two engineering hires starting in month 3:
| Month | Gross Burn | Revenue | Net Burn | Cash Left |
|---|---|---|---|---|
| 1 | $250K | $70K | $180K | $2.52M |
| 3 | $282K | $82K | $200K | $2.13M |
| 6 | $282K | $103K | $179K | $1.57M |
| 9 | $282K | $130K | $152K | $1.07M |
| 12 | $282K | $163K | $119K | $668K |
| 15 | $282K | $206K | $76K | $378K |
| 18 | $282K | $259K | $23K | $237K |
Assumes 8% monthly revenue growth and +$32K/month fully loaded cost from month 3. The naive formula said 15 months; the model shows the company approaching breakeven around month 19 without ever hitting zero — but only if growth holds.
This is Paul Graham's "default alive or default dead" question: on current growth and current burn, does the company reach profitability before the cash runs out? The table above is default alive at 8% growth — and default dead at 4%, where cash zeroes out around month 16. Every board should know which side of that line the company is on, and most can't answer because they've only computed the single-division version.
Burn Rate Benchmarks by Stage (2026)
Ranges below reflect typical US venture-backed companies in 2026. Capital-intensive sectors (hardware, biotech, defense) run higher; lean AI-native software teams increasingly run lower than their 2021 equivalents at every stage.
| Stage | Typical Team | Monthly Net Burn | What It Should Buy |
|---|---|---|---|
| Pre-seed | 2–5 people | $15K–$50K | A shippable product and first users |
| Seed | 5–15 people | $50K–$150K | Product-market fit signal, first repeatable revenue |
| Series A | 15–40 people | $150K–$500K | A repeatable go-to-market motion |
| Series B | 40–120 people | $400K–$1.5M | Scaling a motion that already works |
The efficiency check investors actually run: burn multiple = net burn ÷ net new ARR. Under 1.5x is strong, 1.5–2.5x is acceptable at Series A, above 3x is burning cash the growth doesn't justify. Compare against real fund-level data on the Benchmarking dashboard.
The 5 Modeling Mistakes That Make Runway Numbers Lie
1. Counting committed-but-unspent cash as burn savings
A hiring freeze announced today doesn't reduce this month's burn — the current team's payroll is already committed. Model cuts from the date cash actually stops leaving, usually 30–90 days after the decision (notice periods, severance, contract wind-downs).
2. Ignoring annual prepays and lumpy renewals
Insurance, D&O, cloud commits, and annual software renewals land as spikes. A model built on last month's smooth burn misses the $180K January where four renewals stack. Map every contract over $10K/year onto the actual month it bills.
3. Leaving one-time costs in the baseline (or out of it)
A $60K legal bill from the last round shouldn't inflate your recurring burn — but founders also do the reverse, excluding 'one-time' costs that somehow recur every quarter. Rule: if a category of one-offs has appeared in 3 of the last 6 months, it's recurring.
4. Revenue optimism as a load-bearing assumption
The month-by-month model above is default alive at 8% growth and default dead at 4%. If your survival depends on the optimistic case, you don't have 18 months of runway — you have a bet. Run the model at half your planned growth rate and treat THAT date as real.
5. Using salaries instead of fully loaded cost
A $150K engineer costs $190K–$210K once payroll taxes, benefits, equipment, and software seats are included — a 1.25–1.4x load factor. A 20-person plan modeled on base salaries understates burn by $50K+ per month, which quietly deletes 2–3 months of runway.
When to Cut vs When to Raise: The 12-Month Rule
Start raising with no less than 12 months of runway left. In 2026, a competitive round takes 3–6 months from first meeting to money in the bank, and a difficult one takes 6–9. Investors read your runway in diligence — a founder with 4 months of cash isn't negotiating, they're accepting. Closing with under 6 months left usually means a valuation haircut, structure, or a bridge from insiders.
Raise when:
- ✓ 12+ months of runway remain
- ✓ Growth metrics support your next-round story
- ✓ Burn multiple is under ~2.5x
- ✓ The new capital has a specific job, not just "more time"
Cut first when:
- ✓ Under 12 months left and metrics won't carry a raise
- ✓ Growth is flat — new money would fund the same trajectory
- ✓ A 20–30% cost cut gets you to default alive
- ✓ You'd be raising a bridge, not a round
The asymmetry founders miss: cuts made early are small, cuts made late are brutal. Trimming 20% of costs with 10 months of runway buys 2.5 extra months and nobody outside the company notices. The same decision at 4 months is a layoff story and a signal to every investor in your next process.
Runway = cash ÷ net burn is the answer to a trivia question.
The month-by-month model at half your planned growth rate is the answer to whether your company survives.
Compare your burn and round sizing against real market data on the Benchmarking Dashboard at Value Add VC. Originally published in the Trace Cohen newsletter.
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