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.
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?
I think most people hearing that would interpret it as "burn rate" rather than cash expenses.
> When Mattermark was just a tool for VC deal sourcing our total annual revenue opportunity could be measured in the tens of millions. For six months from October 2013 to March 2014 we held headcount steady at 9 people, even as MRR tripled, because it wasn’t time to pour on the gas.
> It was frustrating getting push-back on market size from investors, and somehow we knew if we suspended disbelief just a little longer we’d have a breakthrough… it just took time to see past the initial thrill of making money to the even bigger opportunity. Conversations from the fundraising process clarified our next vertical, which gave us the confidence to triple the team size over the last 6 months. MRR tripled once again.
> Ask Yourself: Am I spending like we’re chasing a big market, when it’s actually a small one? If you’re getting a lot of feedback that the market seems small and you don’t agree, you might need to re-frame your vision. (old vision: Bloomberg for startup investors, new vision: Google for B2B)
The OP believes she had a total annual revenue opportunity of tens of millions of dollars with her original vision but instead of holding true to that vision and executing against it, she apparently decided to change ("re-frame") her vision so that she could appease investors who were telling her the opportunity wasn't big enough to justify an investment.
While some startups really do need capital to fuel their growth, the need for capital can also be a function of one's mentality. Here, it's pretty clear that the OP is more interested in pursuing the largest, broadest and most nebulous opportunity (Google for B2B) than she is in providing a well-defined solution for a well-defined customer segment or segments (Bloomberg for startup investors). In short, the OP's need for capital is the product of her decision to manage her vision based on "bigger is better."
Are we sure this is her vision or that of her investors? The need for VC to generate "outliers" is wrecking a lot of really good businesses.
The CEO of a company is ultimately responsible for setting the company's vision. Period. If the OP changed her vision to win over investors, she doesn't own that new vision any less. She had the ability to pursue the original vision.
There are lots of startups in Silicon Valley that have the potential to be profitable small and medium-sized businesses. They'll never get there because they are run by founders who are drinking the kool-aid and trying to turn their companies into businesses they will never realistically become. But this isn't the fault of the investors. It's the fault of the founders who lack the ability to recognize that the VC path isn't a fit for the type of company they're building.
If you're not filling an efficiency gap, and you're not making money, you're not a business. You can fail one of those criteria and be either a parasite or a charity, but you need both to be a business.
The dollar bills on Sand Hill Road don't have magical properties. When a venture firm invests in your company, it adds cash to your balance sheet. Nothing more, nothing less. Spend that cash too quickly, invest it in the wrong things or don't get far enough with it and you're eventually going to die unless you find another source of cash.
And that's where we have a problem: the crazy burn rates you see in venture-backed startup land are based in large part on the fact that founders are by and large taking for granted their ability to raise more capital.
Just look at the OP's company: it's burning $150-200,000 every month despite the fact that it couldn't raise a traditional Series A and instead had to cobble together $2 million from "4 institutional investors and dozens of angels." The OP spins this as an "unconventional second seed round" but if and when she has to go back to the feeding trough, she shouldn't be surprised to find that many investors will treat her company like a Series B prospect subject to a much, much higher bar.
Bottom line: raising venture capital in and of itself doesn't make you an outlier and no founder should run his or her company like it's an outlier until there is demonstrable proof it is one.
I'm just curious, is this is tech company, how many of those people are developers / designers (high skill required tech workers)? How is it really possibly to run a company that cheap in the UK?
I would love to hear the things that you do for lowering the costs.
We accrued cash and bought a commercial lease with a decade to run from a bankrupt company - prime real estate in the centre of a creative city. Before here, we based ourselves out of a squat, and after we left agreed a retroactive amount of rates to pay the council to turn a blind eye to our having been there. It really pays to shirk estate agents and to instead do "huh, that building is suddenly empty - let's call the owner".
Insurance is also surprisingly cheap, so long as you indemnify yourself against consequential loss, which in our business is a must.
"Extra overhead" runs to not much - maybe a few £k a month.
Oh, and this isn't included in my figure, but is something EVERYBODY WHO RUNS A TECH BUSINESS IN THE UK SHOULD BE AWARE OF - R&D Tax Credits! HMRC cut us a cheque every April.
I'd actually rather we spend a bit more and perhaps become unprofitable for a while, as I want to invest in growth more heavily, but my partner, the loveable tightwad that he is, needs deep justification for every penny spent.
And that's the crux of it. Go into business with the tightest person you know, and spend forever fighting about it, and end up with pretty optimal budgetary decisions, as everything has to be thought/fought about.
There was an annual exercise where a couple of poor managers dumped the whole year's stories from the project management tool and classified them all as creditable or not. Not a lot of fun, but the CFO was always happy with the results!
We even manage to have fun, too.
I just can't wrap my head around where this "other" expense that folks are supposed to have goes.
Sure, you can throw more fuel on and grow faster, maybe, but to burn for the sake of burning, because you have to hit a number... I just do not understand. Bullshit metrics destroy so much. You just have to look at where the NHS has ended up, to understand how this rot pervades (GPs must see N patients per day. Surgeons must "solve" N cases per month. Death rates must be below X.).
Oh - and I am off, but not hugely - has crept up to about £95k with our current headcount of 30, but it's still a gulf apart from the numbers in the article.
For example, it would be similar to me claiming your burn rate of £95k is extremely high because I'm based in India and pay my developers £7 per hour.
As per elsewhere, we admittedly have abnormally low rent costs, and virtually no other costs outside of rent, people, power, and hardware.
30k per employee with all the on-costs is very low. I suspect that a number of these employees are part time or remote workers in low cost countries.
The reason that "startups rarely die in mid keystroke" is that they run out of steering way before they run out of fuel.
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!?
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.
One of the things I've seen a lot of in startups is people failing to understand the difference between planning and strategy. Every startup has a plan - a detailed list of things that they're going to do. Hopefully the founders update the plan as they get new data. If they fail to execute that plan they're often "Well, things happened that we had no control over!" and the startup dies.
What startups need is a strategy. The difference between planning and strategy is that a strategy accounts for things that are uncertain and beyond your control. There is a huge difference between "Our marketing burn is $3000/month because Facebook ads are $100/day" and "We'll spend $3000/month on marketing, split between Facebook and Twitter, skewed to Facebook while our acquisition cost is $0.5/user but shifting towards Twitter if Facebook ad prices start to ramp up as they get less effective." The first is planning. The second is strategy.
So yes, success depends on things outside of your control but if you fail because of that then it's still your fault.
Unless the forces are so strong that it doesn't matter what plan you have in place.
I lived through the 2000 crash (Genomics, but it was basically as crazy as the dotcom area) and survived. I wish I could say it was due to my better planning, but mostly it was luck. When the forces of finance really turn it washes away both the good and bad planners.
I am not sure how rare these are - I have lived (and survived) through two in the last 15 years. I guess the other factor is how long your runway needs to be - I come from the biotech side of tech where you need a runway longer than what a full loaded A380 needs.
I actually think more of a risk is how tightly the money flows are within tech. This really helps to drive growth when the investors are keen, but the same tight linkages are a killer if anything disruptive happens. A small shock can be quickly amplified to something pretty serious.
Of course I agree with you that the most likely cause of start up death is internal.
That's the key, isn't it? Of all startups, how many were born and died within that 15 year span, without being affected by either event? How many were created after, not being affected either?
I think you're talking about learning to run when the part that has people worried here is learning to walk.
My main point is you should always have a plan for how to become profitable in a relatively short period of time if needed. Hopefully you won't need to put it into action, but the time you will save not having to try to figure this out at the last moment might be the difference between life and death of your start up.
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.
This is net, not gross burn. Assuming you have a viable product you should be earning (some) income.
$2k in rent -> must make $80k/year
If you consider an average engineer has a loaded cost of $250k per year and you have 13 of them, that means your monthly burn rate would be $270k before accounting for the other 2 employees (most likely founders taking a much smaller salary). This would also be a conservative estimate based on an average salary of $100k (which is barely scraping by in NYC and SF if you're straight out of college with loans).
So this must mean startups spending less that $250k with 15 + employees are paying well under market rate (by at least $20-$50k)? But that also wouldn't correspond with the salaries being offered via Angel list and Glassdoor. So something isn't lining up here.
"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."
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.
> Where can you cut costs and get away with it?
The second clause is just as important.
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.
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
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.
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.
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.
This simply can't be attributed to "it's their first time". This is selfish, reckless, and inexcusable. How did this even fly with their investors?
I've found that boards for most startups are surprisingly light handed and non-guiding in their approach. They're really supposed to be there to advise, make connections, vote on major corporate decisions, etc. a monthly $15k expense for C-level execs as a sales/marketing expense (when the total investment is millions) is a small detail for the board to be sweating over. They care if revenue is growing, is growth is sustaining, etc.
The FBR for a Jr. Dev (maybe employee #1 or 2) obviously isn't going to be $250k/yr.
At those really low head counts, things really do look different, I agree. But it's like saying growing sales from 1-to-2 units is a doubling in growth. At small scale, everything looks weird. However, once you hit ~10 people the numbers start to line up and they tend to hold even through 100,000 person companies.
It's kind of amazing actually, if you run a company with >10 employees, look at your yearly costs divided by employees. I can almost guarantee that if that number is <$250k/employee/year you're feeling uncomfortable and stressed out month-to-month and if it's >= $250k/employee/year you're feeling like you're growing.
This is important because, unless you've decided to run a lifestyle business and not grow your headcount, you're going to have to keep an eye on this number as a target to sustain. If you can hit it year after year you can stay alive and grow.
Yeah the money has to come from somewhere, if it's not coming from sales, it's coming from VC money.
Here's a guide that shows how a $150k/yr employee ends up costing a bit over $250k/yr.
Here's WP's take on it
Labor burden cost is important to compute and understand because it includes a variety of significant costs that are often viewed as company overhead, but are in fact, costs related to employment. Many businesses fail because they focus simply on payroll and payroll taxes, and neglect to consider the entire actual cost required to enable an employee to perform the work he or she was hired to do.
Fully burdened costs for individual employees can be expressed as a yearly total to provide an estimate of how much the company will spend that year on an employee. It can also be expressed as an hourly cost by dividing the total yearly cost by the number of hours the employee will work. This number is often 50% to 150% higher than the gross hourly wage. As costs are often used as the basis for pricing services or products, this is why it is so critical to obtain an in-depth understanding of the true cost of an employee.
And some more http://www.sleeter.com/supplemental/articles/Labor_Burden_Gi...
Actually, I have an old "new employee, this is what you cost us" sheet a firm gave me a while ago when I worked for them. My salary then was ~$130k/yr
Here's their breakdown:
- 401(k) matching - (variable but the max was) $13k
- Medical - $17k
- Dental - $1k
- Life Insurance - $600
- Long Term Care Insurance - $200
- Social Security - $10k
- Leave - $10k
- Holidays - $5k
- Other benefits - $2700
total benefits: ~$60k
Add in administrative staff, facilities people, security, office space, gym, various other insurances, transit reimbursement, educational opportunities etc and that number easily hit $100k. So my personal burdened rate was about $230k/yr.
Some employees also simply cost more for various reasons and averaged even higher numbers across the board. I think one time I saw the figure and it was something like $260k/yr/employee and there was lots of distress over that being about $20k too high.
The flip side is that we charged out for around $300k-$600k/yr depending on the job.
But for a Series A startup "administrative staff, facilities people, security, office space, gym, various other insurances, transit reimbursement, educational opportunities" should be just "office space". 401k matching should also be 0, and probably dental too.
So I'm still not seeing anywhere close to 200k/employee for a startup.
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 / ...).
Or if that is contracting fees then it isn't really part of your consistent burn rate.
I wonder what Mattermark says about their own company.
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.
Actually, startup = a company, a partnership or temporary organization designed to search for a repeatable and scalable business model
what does that mean?