Burn rate says little about whether a startup is on track
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Re: Burn rate says little about whether a startup is on track
#2Paulg's recent tweet sums up the response to this [1]:
> If you're expanding too fast, don't count on your board to warn you. As VCs, kill-or-cure strategies serve their interests.
VCs like high burn rate companies, because they are beholden to VCs. So in the case that it does work out, the VCs will own a large percentage of the company.
If you are founding a company and hope for the company to be successful and generate some wealth for yourself, high burn isn't necessarily the right strategy.
Re: Burn rate says little about whether a startup is on track
#3I like the analysis but the headline is wrong, it isn't that burn rate doesn't matter, it does, it is that it doesn't tell you anything about the underlying company. So as an evaluation metric it is less useful.
That said, VC money is very expensive money, so getting the most out of it is essential. Being afraid to use it is self defeating, and taking it for granted is risky. But pretty much everyone knows that :-)
Re: Burn rate says little about whether a startup is on track
#4As the article states, general advice won't apply to every situation, but I'd advise any startup that generates revenue to consider that their last round of funding is going to be their last. The startups that don't generate any revenue or very little revenue and have a exit strategy that requires them to be acquired or to get critical mass in order to exploit network effects are the exceptions.
It's great to fund growth by burning money, but once the company reaches a respectable size I'd make a plan for how to reach profitability and update it periodically. That plan might be as simple as ceasing all hiring for a year while the revenues grow enough to overtake costs.
Re: Burn rate says little about whether a startup is on track
#5This is not a quality article.
Presumably, the author is responding to Marc Andreessen's comments here:
http://www.businessinsider.com/marc-andreessen-on-startup-bu...
However, the author has ignored the qualifiers and substance of Marc's comments. Marc specifically said, "behind the scenes, they're plowing through that money either on marketing, overhead, or some other expense, which results in high burn rates."
Marc is talking about companies like Pets.com blowing wads of cash on Superbowl ads. He's not talking about a company like Tesla spending a lot of money on battery innovation and other core research. I think Marc knows the difference between the "burn rates" of Pets.com vs Tesla.
Re: Burn rate says little about whether a startup is on track
#6Burn rate is one of the few variables a startup can control. It matters. A lot.
I know burn rate can't be analyzed in a vacuum (how many variables can be?), and a high burn rate can be a good thing, but my guess is more companies fail (partially) due to poor management of capital than fail due to spending too slowly.
Are there many examples of the latter that anyone knows of, even if somewhat anecdotal?
Re: Burn rate says little about whether a startup is on track
#7Burn rate is one of the few variables a startup can control. It matters. A lot. I know burn rate can't be analyzed in a vacuum (how many variables can be?), and a high burn rate can be a good thing, but my guess is more companies fail (partially) due to poor management of capital than fail due to spending too slowly. Are there many examples of the latter that anyone knows of, even if somewhat anecdotal?
No examples, but the observation that a great deal of success depends on luck, or chance, or whatever you want to call it. Factors beyond your immediate control. The lower your burn rate the longer your runway, all else being equal. The longer your runway, the more opportunities you have for the dice to roll your way.
Admittedly, all else will not be equal as your vary your burn rate, but keeping it down the bare minimum required to do the essential technological development, business development, marketing and sales will always give you better odds of long-term success. That "bare minimum" rate may actually be very high, but it's still something any CEO should be paying careful attention to.
Re: Burn rate says little about whether a startup is on track
#8I disagree with the article because so many of these "unicorns" (yet another term underlining the neoteny and magical thinking of the Valley) aren't building the future. Building the future can pay off at VC-acceptable levels in the long term, but does not consist of huge-in-four-years-or-dead gambits.
It's true that, in the Valley, burn rate doesn't much matter. Your one job as a VC-funded startup CEO is to keep investors interested in you and happy. Throwing them expensive bones is better than throwing no bones. With the former, you may need to raise money in 18 months instead of 24, and they'll ask you a lot of questions about why the bone you threw them cost so much. With the latter, they fund your competitors, and then it's over because they've found a shinier, newer toy and, while you might want to switch stage to a sustainable lifestyle business that doesn't need VCs, in practice it's hard to do that in a company that was never built to last (and that probably couldn't withstand an "oops, we grew too fast" layoff) and because investors often won't let you hold growth to a sustainable rate.
Re: Burn rate says little about whether a startup is on track
#9I like the analysis but the headline is wrong, it isn't that burn rate doesn't matter , it does, it is that it doesn't tell you anything about the underlying company. So as an evaluation metric it is less useful. That said, VC money is very expensive money, so getting the most out of it is essential. Being afraid to use it is self defeating, and taking it for granted is risky. But pretty much everyone knows that :-)
We changed the title to a sentence from the article that better expresses its point.
Re: Burn rate says little about whether a startup is on track
#10In the first dot-com boom, many companies went public before they were profitable. Since you can only go public once, they had a finite amount of capital and a publicly known burn rate. Projecting that linearly allowed computing the company's death date. I had a site which did this.[1] It was surprisingly accurate. I used to get hate mail from CFOs.
Excessive burn rate led to the demise of basically good ideas such as Webvan, the first instant-delivery online retailer. Webvan, pushed by their investors, tried to operate in too many cities, and ended up with about 3% market share in 30 cities, instead of 30% market share in 3 cities. (The head of operations at Webvan went to Amazon, and is responsible for making Amazon a success in that industry.)
This time around, most startups monetize earlier, so we see less of that.