Investigating the burn rate of start-up companies

Q. Stories about startups often discuss the burn rate, or the rate at which a company is spending money, usually per month, sometimes per day. With most of these companies being private, how do you actually figure out the burn rate? My experience has been that most companies wont tell you what it is and neither will their investors. -Bob Brown, Network World

A. As far as the burn rate, it's pretty easy to determine a public company's burn rate by looking on its balance sheet and determining how much cash it has on hand and how much of that cash is being spent on a monthly basis. Let's say a company has $25 million in cash on hand, according to its balance sheet, and is spending an average of $5 million a month. Its burn rate is the $5 million/month or $60 million/year, which tells you that it only has enough money to last enough five months unless it can raise more money from investors or another source.

Finding this information for private companies is more difficult, particularly for the start-up, high-tech and biotech firms where this information is critically important to assessing its prospects. One way that I've found to get that information is when the private company has been funded by a state through an incubator or venture capital fund funded by state money. In many cases, the information about the company's performance is public record because it has been funded by public money.

In other cases, private companies are required to file financial information with state regulators. This is typical for banks, insurance companies and lenders, not high-tech, however.

-- Chris Roush, assistant professor, University of North Carolina at Chapel Hill, former business reporter with The Atlanta Journal-Constitution

Copyright © 2008 Donald W. Reynolds National Center for Business Journalism