When hopes and dreams are loose in the streets, it is well for the timid to lock doors, shutter windows and lie low until the wrath has passed. For there is often a monstrous incongruity between the hopes, however noble and tender, and the action which follows them. It is as if ivied maidens and garlanded youths were to herald the four horsemen of the apocalypse. — Eric Hoffer, The True Believer
We’ve reached Peak Talk About The Bubble. (I share in this collective guilt.)
And that’s a damn fine thing, since much of the current discussion about burn rates, losses, growth, venture, and the business cycle would have been quite useful a year ago, before a number of companies got even more out to sea.
It seems that he Gospel of Growth has had its fever broken, and admitting to losing money and being worried about it is something that CEOs can now do publicly.
Adding to the discussion is a recent post by Danielle Morrill, the CEO of Mattermark, who disclosed her company’s burn rate — $150,000 to $200,000 per month at a 17 month runway after its last funding event.
Morrill’s missive collected commentary from other founders who were willing to share their numbers. Some were higher, some lower, and some not applicable: Good job not losing money, Buffer.
At issue with comparative examples is that burns are not equal. Box, for example, burned through several hundred thousand dollars per day in its last quarter. That’s its cash burn, mind you, not its GAAP loss rate. That makes Mattermark’s burn appear to be little more than a pinprick. But Mattermark has far, far less capital, and access to capital than Box, making the situation precisely bananas and kumquats.
What that means is that we can’t simply take the data we have, shout “burn!” and then call our work complete.
Venture capitalist Mark Suster followed Morrill by publishing an enjoyable post about burn rates, and the question of what is a reasonable level of recurring loss is for a startup. Spoiler: It depends.
But he did have two comments that I want to highlight in our current context:
“Your value creation must be at least 3x the amount of cash your burning or you’re wasting investor value.”
* If you have a large amount of cash in the bank + an untapped credit line + a rapidly growing revenue line + large, supportive VCs + a reasonable valuation then you may consider keeping burn rate slightly higher than you might normally as a way of expanding your business while your competitors can’t due to cash limitations. I call this “using your balance sheet as a strategic weapon.”
Just know the game you’re playing. Know that if market conditions change you may have to scale back quickly, too. If your costs are mostly variable (ie can be lowered quickly) then you can assume more risks. If your costs are largely fixed (equipment, offices, inventory) then be extra careful. High fixed costs + high debt rates killed many great companies in Dot Com 1.0.
What that means is that if you are a Dropbox or a Box or an Uber — a company that is going to eventually have more than $1 billion in revenue — the rules of the game are different than for mortals. Dropbox, for example, has raised thundering mountains of cash, and has a $500 million credit line. You couldn’t kill Dropbox inside of a few years if you tried, whatever its burn rate.
Your startup is probably pretty killable. In fact, you’re probably actively trying to keep it alive, which is worse.
Younger startups are different, which is why Mattermark’s numbers are interesting: We the public get very few looks into startup financials, and when we do, there is a huge bias towards only seeing positive data. (Nexmo, for example, is willing to share quite a lot with me, because their graphs are looking solid and they have cash. I am fully aware that they would go silent if their math suddenly went wonky.)
This sums to the following: If you try and mimic the big kids when you are not of the same ilk, you take your burn up too fast, and instead of ‘investing in growth’ you ‘piss away investor capital.’ Saying that out loud, it seems, is now acceptable in the valley. Which is a change.
A few years ago I got bored with people building apps telling me that if it didn’t work out, they’d just exit to Facebook or Yahoo or some other giant looking to buy more talent at inflated prices. It was something like startup camp: Everyone gets a medal! Lost in the mix was a lot of foolish venture money that funded small dreamers who lost the farm. A few million here, a few million there.
I got bored earlier this year of SaaS people sending me primers on SaaS accounting whenever I fretted about the losses of this company, or that company. It was almost a religious response. I have long taken it to mean that if I pointed out that SaaS Company X was probably losing too much money, other companies with similar, or even worse numbers had to reassure themselves that all was in fact well.
Hence the reaction: Tell him he is wrong! CAC/LTV! Payback period! ARR!
More like Arr-gh.
We’ve reached something of a new era. We’ve gone from, in my short time caring about the technology industry, people saying that revenue doesn’t matter, to people saying that only revenue growth matters, to now, people saying that a balance of revenue growth and more moderate losses is probably the way to go.
Who would have thought?