Winter Is (Probably) Coming (Soon)

Duck everyone. It’s a bubble. Or something close to one. And the good times are going to slow down. Probably soon.

That’s the gist of a recent interview that venture capitalist Bill Gurley gave. His words matter because they cut to the simple fact that too many companies are burning too much money.

Making money is better than losing money, but losing money — burn — can be the prudent and responsible thing to do. Under certain circumstances, it’s great to burn: If you are quickly growing and seeing a huge return over time on invested dollars, setting fire to cash can be great. If your unit economics rock, venture dollars will rain from the ceiling. Use them.

But not all burns are equal: Your burn isn’t my burn or their burn. Sometimes it can look like you’re burning and growing when, in reality, the flicker from your burn that’s dancing in your eyes is actually your business melting the fuck down. The difference is in the details. Let’s run a cohort analysis!

Gurley isn’t the only venture capitalist who is irked that some startups are spending like Croesus while generating newspaper-like revenues. Fred Wilson also recently took shots at the matter:

We have multiple portfolio companies burning multiple millions of dollars a month. Thankfully its not our entire portfolio. But it is more than I’d like and more than I’m personally comfortable with.

I’ve been grumpy for months, possibly for longer than that, about this. I’ve pushed back on long term leases that I thought were outrageous, I’ve pushed back on spending plans that I thought were too aggressive and too risky, I’ve made myself a pain in the ass to more than a few CEOs.

I’m really happy that I’m not alone in thinking this way. At some point you have to build a real business, generate real profits, sustain the company without the largess of investor’s capital, and start producing value the old fashioned way.


Gurley points out that losing millions per month is the new normal. People who would have been afraid to join a firm that heats its floors by burning hundred dollar bills now do so  with abandon. Why? Because the market cares about top — and not bottom — lines. At least for now.

It’s Groupon’s early days all over again.

Gurley hits on the idea of risk repeatedly. The more you boost your burn, the more risk you take on. And if you’re a venture capitalist, the more risk you take on, the more potential loss you face. Profits are great. Losses less so.

The underlying point of Gurley’s and Wilson’s respective riffs is that many companies will have to reduce their burn in the future. And it won’t be easy. And the pair likely won’t be willing to give larger sums to companies that just torched their prior round in ways that they didn’t precisely approve of.

Cash is the oxygen of business. When it runs out, the company dies.

Burning The VC Dollar On Both Ends

Gurley’s thesis isn’t hard to follow: Companies are being rewarded by the market for spending — and losing — huge sums of private capital that they can cheaply and quickly raise given the current investment and equities climate. Or, put another way, investors are giving companies huge sums to burn, because the market is willing to value revenue growth above all else, and thus everyone downstream wins even as losses mount.

This works precisely until it doesn’t.

As long as interest rates remain low, and the public markets remain near record highs, an appetite for larger returns will manifest itself in large amounts of capital accessible to. So the game, for now, is still afoot.

The flip of that, if you want to stare at the market from the top, is simply that piles of public money are helping to keep private money stupid. Amplifying the above is the fact that large tech companies are cash-rich at the moment, boosting sale prices for companies both strong and weak. That money often ends up back in the cycle, and then it’s once more around the sun.

All this leads to a heady condition where startups are burning like mad to generate as much heat as they can, because when you do burn the candle at both ends, to quote Christopher Hitchens, it gives a lovely light.

Again, this works until it doesn’t.

When money gets more expensive, burn becomes more painful, because the dollars that you are torching have a higher value. If you’re not worried about your next $100 million, how safely are you going to spend your current $100 million? But when you might only be able to raise another $25 million, that $100 million is far more dear.

Piles of public money are helping to keep private money stupid.

The end of quantitative easing is rapidly approaching, and as interest rates are broadly expected to rise in the next few quarters, money getting more expensive is not an if, but a when. Public markets are still pretty damn frothy, but not frothy enough for some companies to go public. Burn remains something that public investors fear. There is a pretty big delta between Box’s delayed IPO and the success of Arista Networks’.

Money becoming more expensive for startups will come hand-in-hand with a decrease in the amount of capital that private startups can raise. Some of that money that they had access to will be off chasing alternative asset classes that suddenly became more attractive. Less money means lower valuations and lower burn.

If you can’t raise as much, you can’t burn as much. Well, you can, but then your company dies.

According to Gurley, some big players are about to hit the skids. In the interview, he was explicit: “I do think there is a high likelihood that we’ll see some high-profile failures in the next year or two.” That means billion-dollar flameouts.

And if some of the larger startups are going to go up in flames, dozens, if not hundreds, of smaller, less-well-capitalized startups are going to wind up in the deadpool. That will, perversely, loosen the labor market for companies that don’t lose money. Hell, maybe you will be able to afford that one bedroom in SOMA before you turn 30.

We’re not there yet, however. The IPO window is still open; interest rates are still comically low; and money is therefore comically cheap. But when things begin to shift, the market momentum that so many have ridden to 10-figure valuations will begin to induce drag. The companies that burn the most will be the most hosed.

Something to think about.