Cash is king — especially when you’re a founder building in Africa. You need money to hire, scale and build a product that works. But exactly how much money is enough to have and spend as a business? In other words, how much of a burn rate is “perfect”?
There is no fixed “ideal” burn rate for African startups, but your business should aim to have at least 12 months of runway (the amount of time before it runs out of cash). This timeframe provides the necessary breathing room to iterate, pivot, and secure additional funding if needed.
In this article, we explore the concept of burn rate, discuss its importance, and provide insights on calculating and optimising it for startup success.
What does burn rate mean?
Burn rate refers to the rate at which a startup spends its available capital. For example, Kenyan fintech companies, a prominent part of the East African startup ecosystem, often monitor their burn rates closely to ensure they can sustain operations during periods of market uncertainty.
Similarly, in Nigeria, startups in the health-tech and logistics sectors focus on maintaining a balanced burn rate to withstand economic fluctuations
Why is a startup’s burn rate important?
What’s the point of knowing your burn rate? Is it only important to investors?
Burn rate is critical for several reasons:
- It helps determine a business’s runway. For 54gene, a health-tech startup in Nigeria (previously backed by Ingressive Capital), maintaining an optimal burn rate was crucial in managing cash flow and planning the timing of its next funding round.
- Growth signal to investors. Investors closely monitor a startup’s burn rate to assess financial sustainability. A startup that demonstrates a manageable burn rate and strong revenue growth, as seen with Paystack (now acquired by Stripe), becomes more attractive to investors
- Reflecting Operational Efficiency. North African startups, particularly in Egypt and Morocco have found that managing burn rates allows them to allocate resources effectively. For instance, some Egyptian e-commerce startups have managed to optimise burn rates to fund crucial marketing campaigns, driving higher sales
Difference between gross burn rate and net burn rate
The gross burn rate includes all operating expenses, while the net burn rate considers the revenue generated by the startup.
Understanding gross and net burn rates is vital for startups. Net burn rate, which accounts for revenue, gives a more accurate reflection of financial health. In fact, we often focus on net burn rate when assessing long-term sustainability and potential for growth.
A negative net burn rate indicates that your startup is spending more than it is earning, which may raise concerns about its long-term viability. By closely monitoring both the gross and net burn rates, founders can make informed decisions about their financial strategy and work towards achieving sustainable growth in the competitive business landscape.
How to calculate your startup’s burn rate
Startups across Africa use a simple calculation: summing up monthly expenses to determine their burn rate. For example, a fintech startup in Ghana that spends $10,000 monthly on operational costs would have a $10,000 burn rate. However, this figure becomes more meaningful when compared with revenue streams, market conditions, and the startup’s growth stage
Here’s how to calculate your startup’s burn rate:
- Highlight all your business’s expenses.
- Add up all the monthly expenses.
- Divide the total by the number of months.
Yes, it’s that easy!
Is a low burn rate good for startups?
A low burn rate can indicate financial discipline. However, excessively low burn rates may signal underinvestment in critical areas like research and development or talent acquisition. For example, Helium Health (another Ingressive Capital portfolio company) strategically balanced its burn rate while investing in product development to stay competitive in the Nigerian health-tech market.
However, excessively low burn rates may also indicate a lack of investment in growth or innovation — potentially hindering the business’s ability to compete or meet market demand — since both often require significant investment (whether in research and development, marketing, or talent acquisition).
Therefore, a startup must balance frugality and strategic spending to ensure sustainable growth and competitiveness in its industry.
How can a high burn rate impact startups?
A high burn rate (particularly if it outpaces revenue generation) can pose significant challenges for startups. It may lead to a faster depletion of cash reserves, resulting in a limited runway and increased reliance on external funding.
It can also create pressure to achieve rapid growth — potentially compromising product quality, customer satisfaction, or long-term viability.
But that’s not all.
A high burn rate can also impact the morale and motivation of the startup team. The constant need to meet aggressive growth targets to justify the burn rate can lead to stress and burnout among employees. This can result in a high turnover rate, affecting the overall productivity and stability of the startup.
How to optimise your startup’s burn rate
When managing a startup’s burn rate, you must dive into the financial intricacies that can make or break a young company.
Here are some strategies to optimise your startup’s burn rate:
- Identify and prioritise essential expenses. Ingressive Capital-backed startups like Trove have successfully analysed their spending patterns, allocating resources to growth-driving areas while cutting unnecessary expenses.
- Explore cost-saving measures. Kenyan logistics startups have leveraged technology to streamline operations, reducing burn rates without compromising service quality.
- Monitor and adjust. Most tech startups regularly review their burn rates, adjusting expenses to align with revenue generation, ensuring they remain agile in response to market changes.
- Foster a culture of financial discipline within your organisation. Set clear budgetary guidelines and instil a mindset of frugality and resourcefulness among team members. Encourage employees to think creatively about cost-saving opportunities and empower them to contribute ideas for financial efficiency.
Can a startup’s burn rate fall?
A startup’s burn rate can decrease. You can actively work towards reducing your burn rate to extend runway or demonstrate improved financial stability to investors. However, you must balance reducing expenses and maintaining the resources necessary for growth and innovation.
How a startup’s burn rate can impact funding
A startup’s burn rate significantly affects its ability to attract funding. For example, Nigerian fintech companies that maintained a reasonable burn rate during their earlier stages were more likely to secure subsequent funding.
We at Ingressive Capital prioritise startups demonstrating a clear understanding of their expenditures and a strategic approach to managing cash flow.
The bottom line
There is no one-size-fits-all answer to the ideal burn rate for a startup. However, ensuring that your startup has at least 12 months of runway — regardless of its funding stage — is key.
Are you a founder building the future of African tech? Then, partner with Ingressive Capital and access up to $500,000 in funding plus a dedicated support team. Apply today, and let’s scale your business together.
