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Finding the Right Burn Rate for Pre-Seed Companies – The Relationship Between Burn Rate and Graduation Rate for Our First 150 Pre-Seed Investments

Many of the founders we’ve backed ask us one key question early in their company-building journey – what is the right burn rate, or amount to spend per month, for a company still searching for product-market fit? This is not an easy question to answer, but we have some data from our first 150 companies that have either graduated to seed or failed to raise a seed round and subsequently shut down or sold. My colleague, Marina Girgis, and I looked at the data to get more perspective on the different burn rates between the companies that manage to graduate to seed rounds and those that fail to do so.

Here’s the TL;DR if you are pressed for time:

You cannot save your way to success. Our portfolio companies that graduated from pre-seed to seed typically spent more per month than those that failed to graduate. This result was consistent with what I’ve observed; the companies finding product-market fit spend more to keep up with growth and customer demand. Companies with monthly burn rates that started and stayed low beg the question of whether money was the problem keeping the company from growing versus one of several other things getting in the way of the company growing and scaling.

Since 2016, the average monthly burn rate difference between successful and unsuccessful companies has been fairly small: $59,333 for successful graduates vs. $47,365 for companies that failed to graduate. This suggests that the more important thing is how the money is spent and what it produces than how much is spent overall. The job of a pre-seed founder is to turn investor dollars into insights that get the company closer to finding product-market fit.

Spending more is more likely an effect, not the cause of success. I would not want anyone to conclude that the answer to finding product-market fit is to spend more money. I think the data reflects the reality that companies struggling to find product-market fit often pull back on spend and try to keep burn low to extend runway while they search for product-market fit. Those who have found product-market fit feel more comfortable spending more money and have good investments they can make to handle growing customer demand better. We are also looking at this at the level of averages – we have companies that spent very little and were able to get to the next round and others who spent more than the average and failed to graduate.

Before diving into the data, here are a few caveats to consider:

We define pre-seed rounds as rounds of $1 million or less for companies that do not yet have product-market fit and oftentimes don’t have a live product. That is our definition; other people have more expansive definitions of what constitutes pre-seed, but that is an important caveat for this analysis.

For the purpose of this analysis, we focused on the gross burn rate for the 12 months before a company graduated from pre-seed to seed. Since we invest early, we have pretty good data on what companies spend before raising their seed rounds.

We excluded investments less than 12 months old; we don’t expect those companies to have yet graduated, and including them would have made the results noisier.

A quick note on the chart above. The X-axis is the year and the Y-axis is the average gross monthly burn per month. The green bars represent companies that graduated to seed in that calendar year, regardless of when the pre-seed round was raised. The orange bars represent the pre-seed companies that failed to graduate in that calendar year, regardless of when the initial investment was made. As we noted above, we excluded investments that were less than 12 months old; it didn’t seem fair to judge an investment made late in the calendar year that failed to graduate by the end of that year. The focus was also on looking at the average burn rate for the 12 months prior to closing the seed round to avoid any spikes in burn rate that can happen in the months prior to a fundraise.

Going back to 2017, the average monthly burn rate for companies that graduated (the green bars) was higher than for those that failed to graduate (the orange bars). A few other observations from looking at the data over time:

Today’s burn rates are much higher than when we started investing in pre-seed companies in 2015. I believe some of the increase is due to the dramatic increase in investor capital that came into the early-stage ecosystem during the low interest rate environment period that ended in 2022. In 2022, the burn rates for companies that graduates and non-graduates were roughly equal; I’m curious to see if where things land as we get more data on the 2023 cohorts.

Since 2020, the average monthly burn rate for companies that have not yet graduated has almost doubled. The average burn rate for these companies has continued to rise while the burn rate for companies that graduated has stayed roughly the same. I suspect this is due to 2022 being the year where many VCs didn’t make many new investments but instead bridged or extended existing companies that needed more time and money to continue developing.

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