Predicting Startup Survival Using the Normalized Burn Rate

33 Pages Posted: 22 Aug 2017

See all articles by Ron Berman

Ron Berman

University of Pennsylvania - The Wharton School

Pablo Hernandez-Lagos

New York University, Abu Dhabi

Date Written: August 17, 2017

Abstract

We study the association of startup firm spending with firm survival. We propose that spending per employee (the “normalized burn rate”) captures entrepreneur’s ability to avoid failure better than total spending (the popular “burn rate”).

We derive an analytical model to describe how spending per employee reflects entrepreneur’s knowledge about the contribution of human and non-human input flows to firm value. The model prescribes a U-shape relationship between the level of spending per employee and firm failure, and that most firms spend below the optimum. These hypotheses are borne out by a seven year representative panel dataset of U.S. businesses founded in 2004. The data also show that high levels of education and work experience (proxies for precise knowledge) lead entrepreneurs to spend closer to the optimum.

These results suggest that spending per employee can be a useful metric to compare across firms and to assess managerial decisions within firms.

Keywords: spending per employee, burn, rate, firm, survival, startup, managerial capital

JEL Classification: O31, M13, L25, L26, D21, D22

Suggested Citation

Berman, Ron and Hernandez-Lagos, Pablo, Predicting Startup Survival Using the Normalized Burn Rate (August 17, 2017). Available at SSRN: https://ssrn.com/abstract=3020881

Ron Berman (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Pablo Hernandez-Lagos

New York University, Abu Dhabi ( email )

PO Box 903
NYC, NY 10276-0903
United States

HOME PAGE: http://pablohernandez-lagos.com

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