
Burn rate says little about whether a startup is on track - vjvj
http://techcrunch.com/2015/04/05/burn-rate-doesnt-matter/#.v8qwt9:mjbl
======
Animats
In 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.

[1] [http://downside.com/deathwatch.html](http://downside.com/deathwatch.html)

~~~
Aqwis
It's somewhat amusing that Amazon is on the list with a death date of July 10,
2001. How were Amazon ultimately saved before that point?

~~~
nostrademons
Revenue growth, presumably. If you linearly extrapolate cash/burnrate, but
revenue grows exponentially and eventually makes burn rate positive, then the
prediction will be off.

It occurs to me that a lot of this bubble-like behavior may come from an
initial market leader obscuring what they're _actually_ doing and then lots of
followers jumping on. Amazon was profitable on a unit-sold basis from Day 1,
even before taking investment, but they invested all the profits back into
capital improvements for the business, which made it look like they were
hemorrhaging large amounts of money. Investors and other startups saw this and
their success and thought "The way to succeed in the dot-com era is to burn
lots of money!", completely overlooking that Amazon had validated their
business model _beforehand_ and showed it to be profitable, and then only
expanded afterwards.

I believe that the trend toward "Just get lots of users, and the money will
follow!" in the mid-2000s had a similar origin. People saw the Google founders
say "We didn't know how we were going to make money when we started", it
worked out for them, and so they all started businesses where they had no idea
how to make money. I'm about 98% sure that the Google founders had maybe a
dozen ideas about how to make money at the time they incorporated, they just
needed to test them (so their statement was technically true), and it was
highly likely that at least one would work out.

------
birken
Paulg'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.

1:
[https://twitter.com/paulg/status/584468037559918593](https://twitter.com/paulg/status/584468037559918593)

~~~
misiti3780
i completely agree - and the article clearly fails to make a point of this

------
crystaln
High burn rates serve VC interests. Not surprisingly this article was written
by a VC. High burn rates make companies desperate for more cash on worse
terms, diluting founders equity and control. High burn rates also indicate the
company is shooting for the moon. VCs want unicorns, not just successful
companies. They don't want your careful 100M exit of which you own 30%. They
want a billion plus exit of which you own 5%. The former is far easier to
achieve and most companies aiming for the latter burn out.

So basically, this article is entirely self serving. Surprise surprise. Listen
at your own peril.

------
jasode
This 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...](http://www.businessinsider.com/marc-andreessen-on-startup-burn-rates-
worry-2014-9)

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.

~~~
jgalt212
> 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.

Who's to say Tesla is spending their money wisely on battery tech investments?
Only time will tell if their battery R&D bets will pay off and if not, perhaps
they would have been better off spending that money on Super Bowl advertising.

~~~
jasode
>Only time will tell if their battery R&D bets will pay

My comment was not about an omniscient oracle predicting the future of winners
and losers. Yes, Tesla may ultimately fail. We don't know yet.

The article is bad quality because it _misrepresents_ the statements by the
VCs he's responding to. The three VCs Bill Gurley (Benchmark), Marc Andreessen
(AH), Fred Wilson (Union Square Ventures) of all people would absolutely know
that you have to spend money to make money. And yes, that would sometimes
involve high burn rates.

The author sets up a straw man by implying those VCs are so financially inept
that they only look at "burn rate" in a naked and isolated manner with zero
context to what each company is doing with the money. Therefore, he's
supposedly the lone voice of reason. He thinks he's doing us a favor by
explaining to us that "high burn rate" can be good and we're now smarter than
those VCs for being englightened with such knowledge. Really?! I think that's
insulting the intelligence of HN readers.

Seriously, does anyone think that Marc Andreessen who lived through the zero-
profit cash burning days of Netscape before & after the IPO has no clue about
stupid-vs-smart high burn rates?

Tesla is burning a lot of cash, and they may fail. If so, they would have gone
down in a blaze of glory by way of investing in their technology and betting
wrong instead of spending stupid money on distractions such as Superbowl ads.

------
ChuckMcM
I 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 :-)

~~~
dang
We changed the title to a sentence from the article that better expresses its
point.

------
gz5
Burn 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?

~~~
tjradcliffe
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.

------
CPLX
I stopped reading when he said something about simple algebra proving his
point, and then posted some nonsensical equation that involved the concept of
"milestones per month" or something like that.

For those of us that lived through the first round of internet/investor
blowhards and shady math[1] this style of article is depressingly familiar.

Although at least now when I read this kind of nonsense no trees are killed in
its delivery, so we've got that going for us.

[1] [http://www.amazon.com/Dow-36-000-Strategy-
Profiting/dp/06098...](http://www.amazon.com/Dow-36-000-Strategy-
Profiting/dp/0609806998)

~~~
anthonyarroyo
"internet/investor blowhards and shady math"

Exactly this.

------
the_watcher
The author of the post - partner at an investment vehicle that invests in
startups - severely damages the credibility of this post to me. Burn rate may
not be something VC's care a ton about, in fact, one of the most common
complaints I've heard about raising too much money is that the investors
pressure you to spend it faster than you want or need to. For the startup,
however, burn is one of the most important numbers to care about, since it
determines how long you can live before needing to either raise more money or
become profitable (or at least cash-flow positive).

------
joshjkim
The article misinterprets the Gurley/Andreessen warning call - high overall
burn INDUSTRY WIDE is a fair cause for concern and indicator of sub-optimal
investing/operating, both for individual companies and for the VC industry as
a whole.

On this article's own terms, if everyone is burning like crazy, then it likely
that companies in all four quadrants of the high/low execution/efficiency,
which means there is bad burn going on.

If you are a company, this means time for self-reflection: (if you want to
take the article’s framework seriously) which quadrant are you in? are you
burning cash smartly or dumbly? Do you have framework for determining this? do
you really believe your revenue can grow faster than your costs? are there
places you can reduce cost? how much are you paying for growth in each of your
channels, and which are actually worth it short and long term?

If you are a VC, it is time for portfolio-reflection and (if your portfolio
companies are lucky) some hands-on portfolio-company coaching: is a company
you funded raising again 6 months later (and was this planned…)? have you
asked for a burn report and/or a path to profitability? does the board deck
summarize the company’s return on spending and tie results to spending (not
necessarily in $$ to $$ numbers, but to users, engagement, etc.)? do your CEOs
know their main costs, both fixed and variable?

When $$ floods the early-stage market, both companies and VCs do not ask
themselves these types of questions enough, and I think Gurley/Andreessen are
trying to signal the industry to get more mindful.

------
jewel
As 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.

------
venomsnake
High burn rate is good if you spend it on obtaining market share. The money
influx will stop. The moment that happens -your revenue better be higher than
your expenses.

------
memossy
The money influx won't stop, it will get worse over the next few years.

Consider the case of Europe. Negative yield curves but trillions in pension
funds that need a positive nominal return (5% or so). If they invest even a
portion of their portfolios in negative yielding bonds they then need to buy
assets with growth potential to even it out, with PE and VC being the most
attractive due to their illiquidity ironically.

This isn't like 00 when you could sell NASDAQ and buy US government bonds
yielding 6.5%..

------
pbreit
The thing I'd like the HN crowd to take away from the article is that spending
money is fine if its being done prudently (or even what some might deem a
little recklessly) to grow or build an asset. And in fact, if you have the
rare ability to create value out of cash, you should do so. Being profitable
is comparatively easy.

------
michaelochurch
I 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.

~~~
fearless
Isn't the one job of a startup CEO to keep customers happy? Pandering to VCs
to the detriment of customers seems like a surefire can't miss recipe for
failure. Compare the biggest exits with the biggest disasters and you'll find
that's the main thing that differentiates them.

~~~
bkeroack
VCs pay the bills and call the shots. In a not-yet-profitable startup,
customers do neither by definition.

