Burn Rate and Cash Runway
Definition
Many small-cap companies — particularly in biotech, quantum technology, and cleantech — spend more than they earn. How long they can keep going is often the single most important figure for investors to watch.
The calculation
A company with €24 million in the bank and a monthly cash outflow of €2 million has a cash runway of twelve months. After that, it needs fresh capital — or it must cut its costs.
Why timing matters so much
What counts is not just how long the money lasts, but what the company needs to achieve in that time. If the runway extends to an important trial result, the company may then be able to raise capital on better terms. If the money runs out beforehand, it will be negotiating from a position of weakness — usually meaning heavier dilution.
What to watch out for
The burn rate can change sharply: starting a Phase III trial or building a factory can cause it to jump overnight. A runway calculated from historical figures may therefore be too optimistic. Company statements such as 'funded into the fourth quarter' also refer to planned spending, not actual spending.
Common mistakes
- Calculating the runway from an old quarterly report and ignoring rising costs since then.
- Counting grants that have been awarded but not yet paid out as part of the cash balance.
- Assuming fresh capital is always available — in weak market conditions, it often is not.
Related articles
Educational content only, not investment advice. Small caps are highly speculative and total loss is possible. All information without warranty.