New businesses can often take years before they become profitable by themselves, relying instead on venture capitalists or investors to stimulate their growth and development. They’ll begin to use that money to fund initiatives that will hopefully generate profit in the future and the investors will be watching closely.
The burn rate signals to the investors whether the business is spending too much or too little of their capital. A high burn rate suggests a business is depleting its cash at a fast rate and indicates they are at a higher risk of financial distress. This may lead investors to question leadership’s ability to properly manage funds. A low burn rate, on the other hand, may make the business appear to be afraid to invest in initiatives to help drive them toward profitability which can also make investors question the manner in which funds are being managed.