
Is My Startup Burn Rate Normal? - nreece
https://medium.com/@DanielleMorrill/is-my-startup-burn-rate-normal-882b2bd20f02
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madaxe_again
This is utterly batshit. $10k+ per head as your burn rate???!?

We're a 30 person org. We burn about £80k a month - $125k. Our revenues are
well in excess of that. That includes rent, salaries, and all other expenses.

Then again, I guess when you're playing with your own cash, which started as
nothing because you bootstrapped, you look at things differently, and don't
put "35 foosball tables, offices in manhattan and the valley, and a corporate
getaway to the Maldives" at the top of your "essentials" list.

I see more and more of what I call "startup dickwaving", whereby people
compare metrics on a fairly meaningless basis and act as members of a cute
little club of oh aren't we all so special, rather than, y'know, _BUSINESS_ ,
happening.

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arethuza
"Our revenues are well in excess of that."

Doesn't burn rate cash flow indicate negative cash flow - so if your revenues
are much higher that what you are spending then you don't really have a burn
rate in the normal sense as you are cash flow positive?

~~~
danieltillett
The op did say burn not burn rate. I think quite a few of the disagreements
here are the result of us not being clear about what we mean by different
terms. Burn rate is negative cash flow so cash income - cash expenses.

~~~
arethuza
"We burn about £80k a month"

I think most people hearing that would interpret it as "burn rate" rather than
cash expenses.

~~~
danieltillett
I agree. This is why I said the problem is we need to be more precise in the
terms we use.

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revelation
Love the discussion. VC investors waking up all sweaty in the night, having
their micromanagement self telling them "these kids are going to get us rich,
but they better not use too much money doing it!". If you want to hedge your
bets, buy index funds.

~~~
boracay
Uhm, I don't know. If there's one area where VCs have far greater
understanding than the average startup founder, it's things like resource
management. That doesn't mean VCs should make decisions for you, but they
should be able to help when it comes to e.g. how long you keep your legacy
product going while pivoting.

The reason that "startups rarely die in mid keystroke" is that they run out of
steering way before they run out of fuel.

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pearjuice
I think this is another indication of how many startups are absolutely out of
control in terms of finances. But does it matter? As long as the long stream
of capital injections without meaningful profit to show up for doesn't stop,
it doesn't matter in the slightest.

Looking at those SaaS companies which have employee burn rates way above their
salaries and absolute cost, you can only conclude that they are overspending.
And that's not something to be proud kf. It actually bothers me how burn rate
is artificially increased (ex. redecorating the office periodically, A-office
location) just to show how "fast" a startup is moving.

It is wrong on so many levels but as long as there are investors which keep
pumping air into the bubble, we are safe, right!?

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danieltillett
The question is really impossible to answer as it depends on forces outside
your control such as the willingness of investors to invest. They can switch
on and off at anytime with no warning.

From my outsiders perspective you want to have the ability to become cash flow
positive within 3 months if you need to. Also keep in mind if this is going to
be possible if the funding environment changes - if your customers are also
dependant on investor funding then this is going to be very hard as the start
ups from 2000 found out.

~~~
x0x0
that's the trick, isn't it -- it's not so much your burn rate, because you
understand that; it's what your customers cut if they decide there's a bubble.
eg yahoo during the dotcom bubble: huge chunks of vc were flowing through to
yahoo ads.

That said, I don't know what Fred means, but $10k/engineer is ridiculous.
That's earning well under $100k/year by the time an employer pays social
security, health insurance, employment taxes, and rent. You have to be smoking
crack to live in sf, home of the $3k/mo apartment, and earn so little money. A
standard rule of thumb, more common in nyc than here, is your gross income
needs to be 40x your rent.

~~~
diminish
Do you mean your yearly income must be 40x your monthly rent?

~~~
x0x0
yes, exactly

$2k in rent -> must make $80k/year

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adwf
I don't think I've seen the phrase "ramen profitable" mentioned for years now.
I remember a few years back it used to be the mantra here, is it taught at YC
anymore?

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dmor
It is absolutely still taught -- it gives you control over your future which
is very important. From my post:

"We’ve had two break even months. The first was by accident in October 2013
because we had an unexpected revenue spike. For a moment we felt what it would
be like to completely control our own destiny. The second time was in February
2014, because low growth in December scared the living shit out of us and it
didn’t look like our Series A was going to come together."

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emjaygee
I find this disturbing. I realize that startups are usually associated with
non-linear returns but assuming the burn rate in the OP is about gross
expenses, not just net burndown of the funding, I think that there's a huge
problem with hiring the cheapest engineers hoping to make big bucks from the
IPO rather than the best engineers who can solve the problem in a reasonable
manner.

This speaks to the problem with demand for entry level (meaning cheap) folks
in the tech sector as well as the disruption culture over delivering long term
customer value.

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maaku
Who the fuck cares if you burn rate is "normal." The only question that
matters is _is it higher than it could be?_ Where can you cut costs and get
away with it? If your startup is perfectly on the median, that means half the
startups out there are doing better than you. 9 out of 10 startups fail. Are
you sure you want to be in the 50th percentile?

~~~
kordless
Cutting a cost simply to cut cost is myopic. A better way to look at it is to
shop for value where you can get the biggest returns. Being anal about every
little minutia, as the CEO at least, is a massive waste of time.

~~~
maaku
From the GP:

> Where can you cut costs _and get away with it_?

The second clause is just as important.

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kayhi
"You are expected to tackle a $1 Billion opportunity and achieve hyper-growth
(100% year-over-year or more)."

Aren't VC back start ups looking for way more than 100% growth per a year? I
was under the impression the target is 10-20% growth per a month in revenue.
In other words 100% growth is so low it would likely prevent you from staying
on the VC back track.

~~~
dmor
If you can grow faster than by all means do! The 10-20% guidance you get in YC
is not realistic as you get bigger, smart VCs are much more realistic about
revenue growth (given it is recurring and you don't have to pay to acquire
that revenue again each month).

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bane
Startups are a business, and part of business is understanding what every cost
is. Part of that is understanding what a "fully burdened" employee costs, it's
well over what their salary is.

Understanding what's "normal" is tougher. TBH, "normal" is whatever you're
burning if you aren't wasting money.

A decent WAG at how much money you need to keep a mid-level employee employed
for a year is about $250k, it doesn't matter much where, but you might inflate
that a bit for SF or NYC, and drop it a bit for Nowhere'sville, Nebraska.
That's salary ($100k plus or minus), benefits, office space, administrative
overhead, vacation, etc.

You'll want to earn more than that, on average, per employee per year, to be
profitable.

It's useful in other algebraic ways to get a gauge on other company's burn
rates, size, or needed revenue.

For example, your competitor might advertise that they have 200 employees.
That means they operating a $50m/year business to break even. A reasonable
target for basic sustainment and growth is $300k/employee/year so they'd need
to be a $60m/year business to be growing.

Here's some real world examples:

    
    
       Company     - Revenue        - Employees - Average/employee/year
       Oracle Corp - $38.27b (2014) - 122,458   - $312,515
       Microsoft   - $86.83b (2014) - 128,076   - $677,956
       Facebook    - $7.87b  (2013) - 8,348     - $942,740
       Sony        - $66.12b (2014) - 140,900   - $469,268
       Google      - $59.83b (2013) - 55,030    - $1.09m
       Apple       - $182.8b (2014) - 98,000    - $1.87m
       Radio Shack - $4.473b (2010) - 36,400    - $122,884
       Amazon      - $74.45b (2013) - 132,600   - $561,463
       Lockheed    - $45.358 (2013) - 116,000   - $391,017
       Boeing      - $86.623 (2013) - 168,421   - $514,324
       Leidos      - $7b (prj 2014) - 22,000    - $318,181
       SAIC        - $3.8b          - 13,000    - $292,307
       Tesla       - $2b     (2013) - 10,000    - $200,000
       Ford        - $147b   (2013) - 181,000   - $812,154
       Nokia       - $15,85b (2013) - 55,025    - $288,050
       

Now look down this list and think about who's considered wildly successful and
_hot_ and who's considered on the way out, in the doldrums or has had recent
sell-offs or splits in the company. This isn't perfectly scientific, just a
guideline.

Startups have a slight advantage in that you can sometimes hire employees at a
lower salary in exchange for options. This can temporarily deflate the costs
and let you beat these guidelines for a while. But ultimately you'll run out
of paper to give out and you'll have to start paying people what they're
worth.

However, Startup founders, especially first timers, are often at a
disadvantage because they've never had to handle so much money before. One
startup I was at had a changeover in CEOs and an analysis of non-employee
expenses under the previous CEO showed a $30k/mo travel expense for him and
the CTO.

Turns out the previous CEO and CTO were doing all their business traveling for
sales in business class. We had been chronically understaffed. The new CEO cut
the travel and hired an outside and inside sales-person for about the same and
revenue started increasing shortly thereafter. Interoffice communications was
turned into weekly phone conferences and communication even improved.

Don't spend your money in stupid ways and you'll have more to put behind the
business.

~~~
emjaygee
Revenue per employee is certainly interesting but isn't comparable to the
topic of discussion. It would be very interesting to see what the run rates
for each of these enterprises is. I suspect you could compute this from the
annual statements.

It would be even more interesting to see it broken down by employment
category. Amazon's 132,600 employees probably includes a large number of
pickers and packers diluting the comparison, whereas Oracle's, Microsoft's and
Google's staff are predominantly technical.

~~~
bane
> Revenue per employee is certainly interesting but isn't comparable to the
> topic of discussion.

Sure it is. A startup's burn-rate is almost all in staff. If you have 10
employees, then your yearly burn rate is going to be not that far off the FBR
for those 10 employees (~$2.5m/yr), unless you're in some very capital
intensive business (hardware manufacture or something).

But 10 employees working on a photo sharing app or whatever is ~$200k/mo. Your
hosting fees, etc. are unlikely to be more than a few percent delta off of
that.

Yeah, yeah, I'm sure there is this or that exception. But in your revenue
model for your company you'll need to build all that in. For example, if your
hosting fees cost another $100k/mo for whatever reason, and it's growing 5% a
month, you better figure that in.

If you're making a physical doodad, and your upfront capital costs are $1m and
the per-unit manufacturing costs are $10/item you better figure out how to
cover the manufacturing costs, _as well as_ recoup the upfront costs +
marketing + sales staff + shipping + expected returns before thinking of the
extra over the per-unit sales as profit.

Too many startups discount these things or write them off. They make a doodad
for $10/unit, then sell it at $100/unit then congratulate themselves on the
$90/unit profit they're making. Then they run out of business because they
forgot that they're spending $50/unit on marketing and $50/unit on shipping,
support, returns, warehouse loss, etc.

The problem is that the question "Is My Startup Burn Rate Normal?" is a bad
question. You shouldn't really be comparing your burn rate to anybody else's.
You should be comparing your burn rate to revenue and profit goals and adjust
accordingly.

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myrandomcomment
Wow. Not sure even what to make of this. I think the real answer is who cares?
If you have the right product and if you have the right backing then your burn
should be the right number not to tap out the backing to get to what you
(founders) and investor feel is the right place to cover your nut. If you need
to burn money for a long time then you had better hope you backers are all in
on the company. Either it is the right place to "burn" the money for the long
haul or get out. I am on my 5th startup and have a had a hit or two to the
point that I do not need to work. In the hits it was because the investors
were in it for the long game, they believed in you and the idea and would do
right to see it get there. The topic of burn never came up if you were doing
the right thing for the successes of the company. In my experience, if the
investors were focussed on the burn as anything more then "what number gets us
there" then you were likely to fail.

~~~
danieltillett
The problem is investors don't care about burn until they all decide at the
same time that it is the only thing they care about.

~~~
richmarr
VCs don't care about burn rate. They care about founders who don't care about
burn rate.

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prottmann
Really interesting, but i think that it is the wrong question.

Only you can answer: did you have enough people - and the matching people - to
get the job in time X done and reach your goals?

You can compare your values only the similar startups, that work on the same
problem. Then you now if you pay too much/less or use the wrong structures
(inhouse / outsourcing / ...).

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othmanaba
Rule of thumb is 100k for prototype in 2 months. 1million for a full product
in 1 year.

~~~
richmarr
Bargain! I'd like cures for cancer and malaria, an interstellar space program,
an app that builds other apps without coding, and an O(1) solution to the
travelling salesman problem. kthxbye!

~~~
herge
I'll try my hand at all 5 for 5 million.

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iblaine
The ironic part, "Mattermark is a data platform for venture capital companies"

I wonder what Mattermark says about their own company.

~~~
danieltillett
Mattermark should not really worry about burn rate for this reason. It only
has any revenue if the current funding party continues and if it does then
they can continue to raise as much money as they like. If the market turns
then their income will evaporate to nothing and burn rate will be the least of
their worries.

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wooyi
Lots of commenters are focusing on the high burn rate and missing the point of
the article.

If you have product market fit, high growth rates (20-30% MOM) and a large
market (>$1B), you can rationalize burning that much.

For the rest of us, normal people. It's back to business basics, which is
spend less than you earn. That's all.

~~~
danieltillett
The problem is it is very easy to fool yourself that you have these things
when you don't really. There is the slight problem of redemption rights that
pop up when your investors work out you are just a normal business.

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taytus
I know, I know...startup = explosive growth. But... It's hard for me to
consider something a "startup" when you have more than 1M in the bank and
spending 60K monthly. That's a company!

~~~
frostmatthew
> I know, I know...startup = explosive growth.

Actually, startup = _a company, a partnership or temporary organization
designed to search for a repeatable and scalable business model_ [1]

[1]
[https://en.wikipedia.org/wiki/Startup_company](https://en.wikipedia.org/wiki/Startup_company)

~~~
taytus
You're right, I was using PG's definition
[http://www.paulgraham.com/growth.html](http://www.paulgraham.com/growth.html)

~~~
dmor
(author of the post here) I agree, we don't see ourselves as searching for a
business model anymore. We are scaling something that works now.

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curiously
six digit burn rates just for building a web app with HTML and Javascript?

