Startup and Innovation Management

Principles Crag

BURN RATE BURSTING BLUES

BURN RATE BABA GNANAKUMAR













CHALLENGES







FLIPKART

Burn Rate measures how quickly your BURN RATE cash holdings are decreasing. Gross Burn Rate is the total amount of cash you’ve spent each month. Net Burn Rate is the difference between cash out and cash in. Profitable companies have a negative net burn rate because they are bringing in more than they are spending.



GROSS BURN RATE • Your gross burn runway shows you how long you’d actually last if sales dried up for a while or you had a temporary cash-flow issue such as late-paying clients.

NET BURN RATE • Net burn rate gives you a clear sense of how well you’re actually doing. You might think sales are strong and your business is thriving when in reality you need to pick up the pace or cut your costs or you’ll run out of money in 6 months’ time.

COSTS INCLUDED IN BURN RATE • Set-up costs. This includes special equipment, materials, supplies, and certain technology expenditures

COSTS INCLUDED IN BURN RATE • Costs relating to outside talent. This means anyone brought in to help the project team who is not on your company’s payroll: Consultants, attorneys, contractors, IT specialists and similar personnel

• Salaried employees. This is tricky. It’s tempting to artificially hold down anticipated project costs by minimizing or even ignoring the input of current employees. COSTS INCLUDED IN BURN RATE

COSTS INCLUDED IN BURN RATE • Slush fund. • unanticipated minor expenses that will accrue until the project is completed.





RUNWAY CONCEPT • Startup businesses usually refer to their timeline for profitability as a \"runway.\" The runway tells businesses how long they have before they have to \"take off\" and survive on profits, rather than savings.



CALCULATION

CALCULATION • if your business spent only Rs. 50,000 in the first month and Rs125,000 in each of the following two months, calculate burn rate • Burn Rate after two months • (50,000- 125000) /2 = - 37.5

CALCULATION • The formula for cash runway is simply: • Cash Runway = Current Cash Balance / Burn Rate • if our startup has Rs 900,000 in cash remaining and has a burn rate of Rs100,000/month, we’ve got 9 months of runway—or nine months until we run out of cash. • Rs 900,000 / Rs 100,000 = 9

CALCULATION • Startup, Inc. has just raised $10 million, bringing their cash balance to $11.5 million overall. Over the next three months, they go on to lose $250,000, $300,000, and $275,000, respectively. • In order to calculate Startup, Inc’s burn rate, we would first need to calculate their total losses ($250,000 + $300,000 + $275,000), which gives us $825,000. This means that, after three months, they have $10,675,000 left in the bank. • Next, we’ll insert the relevant numbers into our burn rate formula. • (Beginning Balance – Ending Balance) / # of Months • ($11,500,000 – $10,675,000) / 3 = $275,000 • Knowing that Startup, Inc. is spending $275,000 per month, we can now calculate their cash runway. • Current Cash Balance / Burn Rate • $10,675,000 / $275,000 = 38.81 months

WHAT CREATES • By selling equity (or debt that converts to equity) A RUNWAY FOR MOST • Through sweat equity (working for free gives you an PRIVATE almost infinite runway!) COMPANIES • By using “free” money–grants, etc. THAT ARE BURNING • By selling debt MONEY?

CAN BURN • Most entrepreneurs can’t create RATE BE an immediately profitable GOOD? startup. • There is often a relationship between the type of startup you start and time-to-profitability. Services companies often get to profitability quickly. Product companies often take longer. • Biotech companies, for example, often have years of R&D before they have a commercial product. It just isn’t possible for companies like this generate profits early on.

NOT ALL • A high burn rate is not always a HIGH BURN red flag. For fast-growing startups, a strategic burn rate IS BAD. that aims at gaining market share, winning customers and generating higher profits is essential for growth and attracting investors than a lower burn rate.

HOW • In general I recommend that in MUCH early-stage startups you try to CAPITAL raise at least 15-18 months of YOU HAVE runway. RAISED / YOUR RUNWAY











CASE • Serving home-cooked food is becoming a trend among today’s startups. An example is of ‘N’ number of initiatives jumping onto serving kitchen meals in trains. Yumist was one of them and it was launched in 2014 to cover the daily-meals segment in India, a largely untapped market. The founders were Alok Jain and Abhimanyu Maheshwari who managed to raise nearly $3 million in funding.

ABOUT • Launched in 2014, Yumist was founded by former CMO of YUMIST Zomato Alok Jain and Abhimanyu Maheshwari, a seasoned restaurateur. The company had raised $2 million in December 2015 in a funding round led by Ronnie Screwvala's fund Unilazer Ventures and investor Orios Venture Partners. • India's online food delivery market saw a growth of 150% in 2016 in comparison with 2015, according to a report by research agency RedSeer. Yumist's closure comes at a time when the food ordering market in India is seeing new entrants such as UberEats and Google Areo. Yumist's closest competitor Swiggy recently raised $80 million









BURN RATE • As per the founders, by March OF YUMIST 2017, Yumist had hit the sweet spot. They were making INR 65 in margins per order at an average order serving two people value of INR 190, the delivery outlets were breaking even at just 70 orders a day, and they were acquiring new customers at INR 180 and recovering back this money within 45 days.



FINOMENA • Launched in: 2015 • Founder(s): Riddhi Mittal, Abhishek Garg • Category: Fintech • Headquarters: Bengaluru • Funding: In March 2016, Finomena raised an undisclosed amount of funding from Matrix Partners India, Kaushal Aggarwal, Harshvardhan Chamria and others.

BRIEF OVERVIEW: • Finomena uses to apply alternate data sources and proprietary algorithms to evaluate credit- worthiness of borrowers. It used to facilitate small- ticket loans to students and young professionals for buying electronic devices and appliances. Besides, it also enabled borrowers to purchase high-value phones, laptops, and other consumer electronics online by opting for easy installments or financing options.

SHUTDOWN • Finomena shut down its REASON: operations in August 2017 due to lack of funding, high cash burn rate, and the inability to raise the follow-on funding round. As per reports, there were two buyout offers too which did not materialised. The startup is no longer accepting new users on its platform. • What Are Founders Upto:The founders’ LinkedIn profile still showcase the same designations. There is no further information on their current whereabouts. An email sent to Riddhi did not elicit any response till the time of publication.