Burn Rate

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Entrepreneurship 4: Financing and Profitability

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University of Pennsylvania

Entrepreneurship 4: Financing and Profitability

596 оценки

Курс 4 из 5 — Specialization Entrepreneurship

Start-ups can benefit from a wide variety of financing options on the path to profitability, but how do you know which one to choose? This course explores different financing models, including bootstrapping, organic growth, debt and risk capital, and also provides a clear overview of equity financing including the key types of investors: angels, venture capital, and crowdfunding. You’ll learn about terms, and term sheets, exit modes and what exit strategy might be best for you. By the end of this course, you’ll have an understanding of what success looks like and how it can be financed. You’ll also be ready for the capstone project, in which you will get feedback on your own pitch deck, and may even be selected to pitch to investors from venture capital firms.

Из урока

Private and Public Financing, and Calculating Breakeven

This module was designed to give you a closer look at the advantages and disadvantages of both public and private financing, and to provide you with some simple but powerful tools for estimating how much capital you will need. You'll learn about the added benefits of working with venture capital firms, when and why to consider debt financing, and the latest trends in crowdfunding. You'll also learn to calculate how much money you are losing each month (the burn rate), and when you can expect to become self-sustaining (the breakeven point). By the end of this module, you'll be able to perform your own breakeven analysis so you can make a more informed choice about the best source of financing for you company.

Venture Capital and the Financing of Innovation18:05

Financing: Crowdfunding21:22

Debt Financing13:08

Breakeven Analysis8:19

Познакомьтесь с преподавателями

Kartik Hosanagar
Professor
Wharton School
Lori Rosenkopf
Vice Dean and Director, Wharton Undergraduate Division
Simon and Midge Palley Professor of Management
David Hsu
Richard A. Sapp Professor of Management
The Wharton School
Laura Huang
Assistant Professor
Management
Ethan Mollick
Associate Professor
Associate Professor of Management- Wharton School
David Bell
Xinmei Zhang and Yongge Dai Professor, Professor of Marketing
Marketing
Karl T. Ulrich
Vice Dean of Entrepreneurship and Innovation
The Wharton School

My name is Karl Ulrich.

I'm a professor at the Wharton school.

And in this session is called Burn Rate.

You're going to here as an entrepreneur many times investor asks you,

what's your burn rate?

Sometimes they're just going to say what's the burn?

And they mean something very specific,

they mean what's your net negative cash flow per unit time?

Usually it's expressed in monthly terms.

So the answer might be my burn's around $30,000 a month,

that would be an answer that you might hear.

30,000 a month by the way that's $360,000 a year.

So that's a little bit of a scary thought

because it means that is your net negative cash flow.

The money that has to be provided by the money you already have in the bank or

by money you're going to raise in order to support the burn.

There are two closely related terms, one is called the fume date and

the other is called the runway.

And I want to just explain what these terms are.

And I'm going to apologize for all of us in the entrepreneurial ecosystem for

just mixing metaphors willy nilly here.

There's lots of different metaphors at play here.

But basically the runway is defined as how much cash do you have on hand.

That is, what's the balance in your bank account.

Divide that by your burn rate.

And that defines your runway.

And runway basically means how many months do I have before I'm out of cash?

What's the money you have in the bank divided by your monthly burn?

So let's say you have $210,000 in the checking account,

and you're burning $30,000 a month.

You're runway is seven months, that's the way that calculation works.

You're fume date is the date at which you have no remaining runway.

And so the metaphor, I suppose, is you're burning your cash and

you fume out or you burn all of your cash on the fume date.

And so these terms are related simply by cash on hand,

divided by burn rate, is runway.

And the end of the runway,

the time at which you hit the end of the runway is called your fume date.

Sometimes the burn rate is not constant and linear.

It's not just $30,000 a month.

And this might be the case when you have some unusual payments that you expect or

when know you have a certain investment coming in or you have to pay for some

inventory and you might experience greater than usual cash outflows in some month.

And so for that reason, most entrepreneurs once they're up and

running a little bit, will do much more detailed cash flow planning and

will actually do a forecast of what the cash balance is

based on the proforma financial statements for their company going forward.

And we'll use that to determine the fume date.

So I'm showing here an example from a real company, one I'm an investor in.

This graphic is provided every month in a presentation that's shared with the Board.

And essentially what it does is it shows the projected balance

of cash out into the future.

And if you read this slide, you'll see that the forecast

is that the company will run out of cash in June of year 2017.

That's the point at which the cash balance goes to zero.

So you can approximate your runway, your burn rate,

your cash flow with a simple term like, I'm burning 30,000 a month.

But if you have a lot of variability in either spending or

inflows of revenues, then you want to do a more detailed cash flow planning that's

going to produce a graphic like this.

It will help you much more precisely estimate what the fume date is for

the company.

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