Burn rate and runway are the two numbers that tell you how long your startup can survive: burn rate is how much cash you lose each month, and runway is how many months you have left before the bank account hits zero. The runway formula is simple: cash in the bank divided by your monthly net burn.
That’s the whole idea. The hard part isn’t the math, it’s doing the math every month, being honest about the inputs, and picking the date you’ll make a call before the number makes it for you.
What burn rate and runway actually measure
In the video above, Y Combinator partner Tim Brady puts it in one line: “burn rate is a measurement of cash flow, not profit and loss.” That’s the bit most founders get wrong. Your P&L can say you had a great month while your bank balance tells a very different story, because a signed contract that pays next quarter does nothing for this month’s cash.
Brady’s other line is the one I’d tape to the monitor: “running out of cash is usually how startups die.” Not bad ideas. Not competitors. Cash.
So when people say startup runway or cash runway, they mean the same thing: months of cash left at your current pace. Everything below is about getting that number right and then acting on it.
Gross burn vs net burn: which one matters?
There are two burn numbers, and you need both.
- Gross burn is every dollar of cash going out the door in a month: payroll, contractors, rent, software, ads, insurance, all of it. It ignores revenue. It tells you how heavy your cost base is.
- Net burn is gross burn minus the cash that actually came in from customers that month. It tells you how fast the bank balance is really shrinking.
Runway uses net burn. Gross burn is still worth watching, because it’s the number that stays with you if a big customer churns or pays late. A founder with $80,000 gross burn and $30,000 of revenue is in a very different spot from one with $50,000 gross burn and zero revenue, even though both have $50,000 net burn. The first one has more to lose if sales wobble.
One rule I’d hold firm on: money from investors, loans or your own pocket isn’t revenue. A fresh SAFE makes the bank balance bigger. It doesn’t make your burn smaller.
How to calculate burn rate and runway, step by step
Here’s how to calculate burn rate without fooling yourself. Do it from your bank statements, not your accounting software’s profit report.
- Pull the last three months of bank activity. One month lies. An annual software renewal or a big quarterly tax payment can make a single month look awful or great. Three months smooths that out.
- Add up all cash out for each month. That’s gross burn. Average the three months.
- Add up cash in from customers only. Leave out funding, loans, transfers between your own accounts and anything you put in personally.
- Subtract. Average gross burn minus average customer cash in equals net burn.
- Divide your current cash by net burn. That’s months of runway.
- Re-run it with what’s already committed. The hire who starts next month, the new office lease, the price increase from your cloud provider. Backward-looking runway is a comfort blanket. Forward runway is what’s real.
A worked burn rate example (with example numbers)
Picture a founder with a small software company and $600,000 in the bank. These are example numbers for teaching, not benchmarks. Her average month looks like this:
| Line item | Monthly cash (example) |
|---|---|
| Payroll (including her own salary) | $52,000 |
| Contractors | $8,000 |
| Marketing | $7,000 |
| Software and cloud | $6,000 |
| Rent | $4,000 |
| Everything else | $3,000 |
| Gross burn | $80,000 |
| Cash collected from customers | $30,000 |
| Net burn ($80,000 – $30,000) | $50,000 |
| Runway ($600,000 / $50,000) | 12 months |
Twelve months feels like plenty. Now she adds the engineer she’s been planning to hire in month three, at $12,000 a month all-in. After two months at the old pace she’s got $500,000 left, and her net burn jumps to $62,000. $500,000 divided by $62,000 is about 8 more months. Total runway: roughly 10 months, not 12.
One hire just cost her two months. That’s not an argument against hiring. It’s an argument for knowing the price before you sign the offer letter.
And notice her own salary is in there. If you’re paying yourself nothing to stretch the runway, you’re hiding a cost that comes back later, so work out how to pay yourself as a business owner and put the real number in the model.
Default alive or default dead? The question behind the runway formula
Runway assumes nothing changes. Revenue usually does. That’s why I like Paul Graham’s test from his 2015 essay Default Alive or Default Dead? He asks founders: “Assuming their expenses remain constant and their revenue growth is what it has been over the last several months, do they make it to profitability on the money they have left?”
Run that on our example founder, with expenses flat at $80,000 and revenue starting at $30,000:
- Revenue growing 5% a month: she crosses $80,000 in month 21 with about $45,000 left. Default alive, technically. That’s a terrifyingly thin cushion, but she lives.
- Revenue growing 3% a month: the cash runs out in month 15. Default dead.
Two points of monthly growth is the difference between a company and a cautionary tale. That’s why I’d rather see founders obsess over this one question than over a fancy dashboard.
Graham also says half the founders he talks to don’t know which one they are, and that the trap is assuming it’ll be easy to raise more money: “that assumption is often false, and worse still, the more you depend on it, the falser it becomes.” His fix is blunt. Write down “precisely what you’ll need to do to survive if you can’t raise more money, and precisely when you’ll have to switch to plan B if plan A isn’t working.”
That second part, the “when,” is your decision date.
How long does a raise take? Set your decision date before you need it
Your decision date is the day you commit to one of three paths: raise, cut, or get to profitable. Pick it while you still have options, because every month you wait takes options off the table.
If raising is on the list, be realistic about time. DocSend’s research with Harvard Business School professor Tom Eisenmann found that “the average length of time it takes to complete a seed round is 11-15 weeks,” and DocSend recommended allowing “six months of runway to raise funds,” three months to pitch and three more to work out a plan B if nobody bites (DocSend, 2019). That data is a few years old, so treat it as a floor, not a promise.
The gap between rounds is longer than most first-time founders expect too. Carta’s Q1 2026 report says “the typical period between seed and Series A stands at an even two years,” with a median of 2.1 years from Series A to Series B (Carta, State of Private Markets Q1 2026). That’s a median, so half of companies took longer.
Back to our founder with 10 months of real runway. If she wants six months for a raise plus plan B, she has to be pitching by month four. Give her a month to prep the numbers and the deck, and her decision date is about month three. Not month nine. Month three.
Raise, cut, or get profitable: what to do on your decision date
When the date arrives, you look at the default alive math and pick. No hand-waving.
- Raise if growth is strong enough that investors will actually care, and you’ve got at least six months of runway to run a real process. Graham’s warning applies: never treat fundraising as more than plan A.
- Cut if you’re default dead and growth isn’t going to fix it in time. Cut early and once, not a little every month. Graham calls hiring too fast “by far the biggest killer of startups that raise money,” so payroll you added ahead of demand is the first place to look.
- Get profitable if you’re close. Raise prices, chase overdue invoices, move customers to annual prepay, drop the spend that isn’t pulling its weight. Founders who bootstrap a startup without investors live on this path every month, and it’s a lot less scary once you’ve done the math.
None of these is the “right” answer in general. The right answer is the one you choose on purpose, with numbers in front of you, instead of the one forced on you in month nine.
The monthly runway habit that keeps you honest
Knowing the formula is worthless if you calculate it once for a pitch deck and never look again. This is the gap I see everywhere: founders who can explain burn rate perfectly and still couldn’t tell you this month’s number.
Put 30 minutes on the calendar on the first business day of every month. Pull the bank data. Update gross burn, net burn and runway. Re-run the default alive check. Look at your decision date and ask if it’s moved. Then tell your co-founder or your board the number, out loud, even when it’s ugly. Especially when it’s ugly.
Do that for a year and you’ll never be surprised by your own bank account. That alone puts you ahead of half the founders Paul Graham talks to.
Frequently Asked Questions
What is the difference between gross burn and net burn?
Gross burn is all the cash you spend in a month. Net burn is gross burn minus the cash customers paid you that month. Runway is calculated with net burn.
What is the runway formula?
Runway in months equals cash in the bank divided by monthly net burn. With $600,000 in cash and $50,000 net burn, you have 12 months, before any new hires or changes.
Is burn rate the same as net loss?
No. Burn rate measures cash leaving the bank, while net loss is an accounting figure. Revenue you’ve booked but haven’t collected doesn’t reduce your burn until the cash arrives.
How much runway should a startup have?
There’s no single number, but leave room to raise or change course. DocSend’s research found seed rounds took 11 to 15 weeks and suggested six months of runway for a raise plus plan B.
What does default alive mean?
Paul Graham’s term for a startup that reaches profitability on the cash it has, assuming expenses stay flat and revenue keeps growing at its recent rate. If it doesn’t get there, it’s default dead.