How a Startup’s ‘Burn Rate’ Influences Its Success
Knowledge@Wharton
A critical factor that determines whether a startup succeeds or
fails is its level of spending, or burn rate. These include decisions
about how much to spend on product launches, how much initial funding to
raise and how to allocate other funds. Some startups aggressively spend
to attract quality employees, get economies of scale early and grab
market share from the incumbent. But overspending can also signal bad
management and a waste of resources that could be used to compete
against rivals. However, being thrifty has its downsides, too: The
startup might have trouble meeting demand or is not aggressively
exploring opportunities for profit.
The key is to reach a balanced rate of spending, according to a research paper titled “Startup Survival and a Balanced ‘Burn Rate’,” co-authored by Wharton marketing professor Ron Berman
and Pablo Hernandez, an economics professor at NYU Abu Dhabi. They also
found out that the more education entrepreneurs have, the more likely
their startups will succeed. However, an entrepreneur’s level of
experience generally does not have much impact on a startup’s survival,
their research showed. The research was supported by Wharton’s Mack Institute for Innovation Management.
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