QUESTIONS

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a) Your startup started the year with $200,000. In the second month it had $180,000 and in the third month $160,000. The average burn rate is therefore $20,000.
b) A startup is expected to have negative cash flow at the outset, hence the need to raise capital to cover the burn rate.
c) The higher the burn rate, the lower the risk your startup poses to investors.
d) It is used to calculate the time your startup has to survive (runway) to close a new round of investment or to reach the break-even point.

The statement that is wrong in this context is:

c) The higher the burn rate, the lower the risk your startup poses to investors: This statement is incorrect. In reality, a higher burn rate often indicates a greater risk for investors. A high burn rate means that the startup is spending its capital quickly, which can raise concerns about the company's ability to reach profitability before running out of funds. High burn rates are generally viewed as risky because they can lead to a shorter runway, which is the time a startup has before it exhausts its cash reserves. Investors typically prefer startups with a lower burn rate that can sustain operations for a longer period without the need for additional capital, increasing the chances of success and reducing the risk of running out of funds prematurely.

The other statements correctly describe the concept of burn rate:

a) Your startup started the year with $200,000. In the second month, it had $180,000, and in the third month, $160,000. The average burn rate is, therefore, $20,000: This statement correctly calculates the average burn rate by measuring the decrease in cash over time.

b) A startup is expected to have negative cash flow at the outset, hence the need to raise capital to cover the burn rate: This statement is accurate. Startups typically have negative cash flow initially because they are investing in growth and development, and they often need to raise external capital to cover their expenses, including the burn rate.

d) It is used to calculate the time your startup has to survive (runway) to close a new round of investment or to reach the break-even point: This statement accurately describes one of the key uses of the burn rate. It helps calculate the runway, which is the time a startup can continue operating before running out of funds. This information is crucial for planning and securing additional investment or reaching profitability.

QUESTIONS

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