Startup Survival and a Balanced “Burn Rate”

How much to spend is a key managerial decision for entrepreneurs. Arguments favoring lean startups rely on the burden of rapid growth, reduced monitoring costs or the inefficient use of cash. Arguments favoring high “burn rates” rely on the early creation of economies of scale and complementary assets; and the motivation benefits of efficiency wages and experimentation. We argue that survival benefits of spending should be balanced against the potential costs and empirically show that there is a U-shaped relationship between burn rate and the probability of failure. In addition, drawing on the literature of entrepreneurial human capital, we find that an entrepreneur’s education and confidence about possessing a competitive advantage over competitors have a positive relationship with balanced spending leading to lower failure rates.