Life sciences and biotech companies can rise or fall depending on their clinical trial results. The sector is filled with small-cap companies working towards securing the necessary clearances from regulators, and they can tear through millions of dollars in R&D before their products get to market. Running out of cash is an ever-present danger.
If you’re just getting started, most of your funding will probably go toward securing lab space, supplies and equipment to help you get through discovery. It's not easy to manage your spending when the funds needed to support the development process could easily top millions of dollars. But you can stretch the money further by closely monitoring one number: the burn rate.
Burn rate is the rate at which your company spends money after an influx of cash. For instance, if you’re spending $250,000 per month to stay operational, you have a gross burn rate of $250,000, assuming there’s no revenue to offset these expenses. Simply, it’s your company’s negative cash flow.
Burn rate gives you another critical metric—your runway. If your burn rate is $250,000 and you have $4 million in funding, your runway is 16 months. That’s how long you can finance operations before you run out of cash in the bank.
Your company’s burn rate is just one indicator of the sustainability of your company. Others include the market, your strategy, and your product-market fit. However, it will hint at overspending and nudge you towards more effective replacements for needless expenses.
Your cash burn rate effectively tells you:
The usual advice for startups is to target having 12 months or more of runway at any time, especially in early seed rounds. That allows time for projects to reach the next milestone plus wiggle room to organize the next funding.
However, this advice is not realistic for life sciences companies. It can take years and years for a drug to travel from the lab to the market and, as much as you want to reduce your burn rate, restricting your spending means you could fall behind on important milestones and lengthen the time to commercialization.
Instead of trying to keep your burn rate under an arbitrary threshold, it’s better to implement some key habits early on. Here are four strategies that can help.
If you’re still relying on spreadsheets, stop! Managing your spend needs to be supported by a robust, automated, real-time system for tracking expenses, utilization rates and efficiency for granular transparency into how much you are spending and where you are spending it. Which expenses aren't directly leading to the next milestone? What expenses can you reduce, defer or cut off?
It’s easy to get caught up with fast-paced spending while you’re in the development stage, but fundamentally it’s a zero-sum game. If you spend $500,000 on building out an office, you can't put the same money toward product development. You must make a choice about where to invest, and make sure you choose wisely.
Efficient spend management starts with a clear plan. Set a burn-rate budget and review it weekly. Make sure everyone knows you’re tracking this and is staying within the boundaries. When someone asks for a budget item, they can map it to your targets to justify the investment, and you will be better able to make financially responsible decisions when you inevitably need to deviate from the plan.
Funding is a valuable resource, but it isn’t your only resource. By using all of the resources at your disposal, you can maintain a healthier burn rate and lengthen your runway.
One of your biggest assets is your team of investors. If you’re working with a VC fund, for example, you might have access to marketing, business development, admin and research experts, all of whom can help you find clever ways to support your development without overspending. At the very start of the development cycle, incubators and accelerators can give a fledgling research project the breathing room it needs to ensure the runway doesn’t end before the research does.
Burn rate is something that investors are keeping tabs on and it’s essential that you maintain a level of transparency and collaboration with your investors. To be taken seriously, you must be able to justify expenditure and tie investments directly to key milestones. If your investors are unhappy with the choices you're making, it's time to reconsider your burn rate and cash allocation.
This comes back to getting the right systems in place – if your financial analysis starts and ends with Excel spreadsheets and QuickBooks, you may not inspire much confidence.
Burn rate is easy to calculate and tricky to manage, since there’s no magic formula for life sciences companies to follow. A company with a low burn rate could fail in the long run if its clinical trial fails, while a high burn rate could be reversed overnight with promising lab results or by receiving a milestone payment from a key partner.
To manage the uncertainty, it's essential to monitor cash burn from all angles. Having a reliable system of accounting, budgeting and internal controls will help protect your company’s credibility, deliver opportunities for improved efficiency, and make funding last longer as your company grows.