Do the fictional burn rates actual mirror reality in any way? Specifically, do you have such a variance in burn rates (25K-750K) and can you share your median burn rate and runway? Understand if you can't for competitive reasons, but as an entrepreneur, it would be interesting to see those stats.
fredwilson
· 1 year ago
I made them up. They have no basis in reality. But we do have companies in our portfolio with 25k burns and also 600k burns. Thankfully the cash balances are roughly proportionate
Johndmc
· 1 year ago
Fred, To make the format changes you want, you can just format each axis. Right click on the y-axis, go to Format Axis, check the "Values in Reverse Order" box to change the order to get the x-axis numbers at the bottom. Then enter -200,000 in the "Value (X) axis crosses at:" box. Then right click on the x-axis, Format Axis and enter 18 in the "Value (Y) axis crosses at:" box.
Might be a more elegant way to do this, but this should work.
seth godin
· 1 year ago
I never disagree with you Fred, but why not cut the burn rate to zero? then you have an infinite runway, right?
The entire purpose of building a company is to grow it, and that's why VCs invest. So, you ought to have people working for you that help you grow, to get somewhere. REGARDLESS of the state of the economy. In other words, why was it okay for lunkheads lauded by the tech blogs to hire dozens of people they didn't need 18 months ago, but not okay for them to hire them today?
If someone is adding real value to your team, helping you grow share and get where you're going, then hire them. If they don't, then don't.
The current "lay people off" craze ought to be replaced with a long term "hire good people you can afford" mantra, I think.
Squidoo hasn't laid anyone off, and we're really proud of that.
mattmaroon
· 1 year ago
I think by burn rate he means total expenditures. Presumably you can't cut that to zero and still be in business.
As to why hire so many people, though I generally disagree with it the theory is land grab. Get there before your opponent does. Personally I think Facebook's success, despite coming to the party well after MySpace shows that is overrated. Same with Google/Yahoo, YouTube/Google Video. All of those became competitive with or totally conquered much better-funded rivals who were there first, even with a network effect.
skmurphy
· 1 year ago
Burn rate is your net cash withdrawal from working capital. If you have revenue in excess of spending then your burn rate is zero because you are not making withdrawals. Seth is suggesting that these startups focus on more revenue now instead of planning to raise another round to stay alive.
mattmaroon
· 1 year ago
Ha, you know, nowadays that notion hadn't even occurred to me :)
fredwilson
· 1 year ago
very few of our portfolio companies have reduced headcounts either seth. i am not saying that they should. i am just saying that companies with high burns and short runways are in the danger zone. we have a bunch of companies in our portfolio in the "betting on revenue" quadrant that have not cut their burn rates. they are investing their cash balances in sales and marketing and product. and i am sure that some of them, hopefully all of them, will make those investments pay off
Dan Cornish
· 1 year ago
Betting on revenue is a very tough place to be. I would argue in this economy that the odds of this bet have dramatically increased. What happens if revenue does not materialize? In 1987 after the market crash, the damage happened in slow motion. By 1989 people were walking away from homes in Connecticut, I know because I bough a house whose price was cut in half between 1988 and 1989. The damage from this market drop will take years to be fully evident. This in my opinion is much deeper. Revenue will not materialize, assumptions should be reexamined. This time is no different.
fnazeeri
· 1 year ago
I agree. Cutting costs is a tactic, not a strategy. When you find yourself in a whole the first thing you want to do is stop digging. But you still need to find a way to get out of the whole. The key point that you're making is, "ensure you have enough runway to figure that strategy out."
Steven Kane
· 1 year ago
Hi Seth
Yes, it does seem that careful planning and frugality have only recently come back into vogue out in Silicon Valley.
Boom times or bust, every startup should have a simple, huge, boldly lettered sign on the wall (or tattooed on the CEO's forehead):
Live to fight another day.
As always, common sense is a trade secret.
alan p
· 1 year ago
@Seth you have two issues to get to zero burn rate:
(i) Pre revenue companies have zero inflow, so can only have zero burn rate with zero outgoings - in effect they need to hibernate, and that implies they can no longer Carpe the Diem :)
(ii) Even those with revenue often cannot function and simultaneously build a business with the staff they can afford at zero burn.
But take your point - there is an interesting game theory here, in that if all other VC's are losing their heads, this is perhaps the time to give your startup its head - get that industry giant position sorted now, it'll never be cheaper to do.
@ Fred - is the 18 month runway the current "best guess" for time in the tunnel then?
ErikSchwartz
· 1 year ago
We're upper left, our expenditures are still really low, our cash on hand is OK, and we're starting to get some revenue traction (in unexpected places) which gets us towards cash flow neutral.
The thing that boggle my mind about some of these layoffs is how big some of these companies are in terms of headcount. Seesmic laid off 30%, and that was 7 people. Seesmic had more than 20 headcount? Doing what?
If you stay lean in good times, bad times hurt much less.
maxniederhofer
· 1 year ago
Very interesting to see this made explicit in terms of setting priorities from a point of view of VCs.
As a heuristic for follow-on financing, it could also take into account capital deployed (size of circles?), as sunk costs are a definite worry in the "middling third" of a fund. Gotta recoup some of that cash and incremental multiples might actually be attractive.
zackmansfield
· 1 year ago
This is a nice point re: capital deployed to date. Fred's chart works very well and I agree in whole with the various quadrants. I imagine many of his portfolio companies (and other web 2.0) are "lucky" in that they can turn on and off variable costs fairly easily. The worst situation right now may be for capital intensive businesses (think large inventory or CapEx component) that were approaching nice run rates and maturity in their life cycles (perhaps only a "quarter away from breakeven") who are now suffering from a general slowdown in the economy. When you have tired investors around the table, they may be unwilling to put yet another round together. Which leads to the inevitable attempt to go after Plan B, which may be to try and sell the company to recoup a bit of the investment. Of course, that may have seemed like a plausible idea as a backup 6-12 months ago. Not as much now.
fredBuddemeyer
· 1 year ago
what is this crisis/correction/loomingRecession? an evolving learning system. and here is an instance of what any decent system does to learn. yes we should have all had these matrices since ... the days in which excel was still intuitive. but with so many dynamic inputs, crazes (financial derivatives, widget mania) displacing pre-conceived notions at any given time it's impossible to consistently have the "right priorities" over any short term.
so you can either be a consistent, conservative, coot - and look small in good times. or constantly adapt after the fact - and look like a presidential candidate. either way you win - and lose. and the more learned system evolves towards a more complex "crisis"
nivi
· 1 year ago
Wow. Thanks!
A couple questions:
1. Do you think any startup that is laying off less than 33% of its team is really doing a layoff? Or are they just getting rid of the deadwood? 33% layoffs give you a 50% increase in runway (assuming most of the burn is from headcount and everybody has the same salary.) Anything less than a 50% increase in runway seems too small. What do you think?
2. Is this matrix equally worthwhile in "good times"? Your post focuses on extending runway through revenue and internal investors. In good times, you would add external investors to the list, but I think the matrix is equally worthwhile.
fredwilson
· 1 year ago
Nivi
I think the matrix works in good times and in bad but is particularly useful when financing is hard to come by.
A layoff is a layoff in my book. I hate to see them happen whether its one employee or thousands. I don't think there are any metrics that make sense in the abstract
I think this is also a good chart for an individual company not just a portfolio. You can chart this monthly and see which way the company is moving.
This works even if you are bootstrapping because you'll go through cycles, even when you're bootstrapping you go into burn rate the scales just change.
Gerald Buckley
· 1 year ago
Mr. Wilson - Just curious... how did you decide to place the nexus for your quadrants (@ $-200K and 17.5 mos of runway)? Suspecting this is an aribtrary placement as what might be considered Comfort quad for some is different from fund to fund (or, for that matter company to company).
fredwilson
· 1 year ago
As I said, it depends on the fund
$200k x 18 months is $3.6mm which is the most that our fund could possibly fund ourselves if we had to do that to keep a promising company alive for the next year and a half
Frankly 18 months might not be enough but that's the longest horizon I can think about in the VC business
Hope that helps
LEADSExplorer
· 1 year ago
Great analysis for segmenting companies This is a static view of any situation of a company.
In business choices have to be made where to invest in: - Increase marketing spending for more lead generation - Decrease marketing spending using other channels - Increase sales force for closing more deals - Decrease in sales force in order ot survive or become an OEM supplier - Develop new products - Discontinue existing products for less support costs
Investors look for future revenues and earnings, not the current situation, and that is what drives entrepreneurs too.
All Comments
Thanks to four years in finance, I quickly created the survival matrix with the improvements you wanted. Here's a link to the image: http://farm4.static.flickr.com/3194/2978564856_...
http://twitpic.com/ifmk
Do the fictional burn rates actual mirror reality in any way? Specifically, do you have such a variance in burn rates (25K-750K) and can you share your median burn rate and runway? Understand if you can't for competitive reasons, but as an entrepreneur, it would be interesting to see those stats.
To make the format changes you want, you can just format each axis. Right click on the y-axis, go to Format Axis, check the "Values in Reverse Order" box to change the order to get the x-axis numbers at the bottom. Then enter -200,000 in the "Value (X) axis crosses at:" box. Then right click on the x-axis, Format Axis and enter 18 in the "Value (Y) axis crosses at:" box.
Might be a more elegant way to do this, but this should work.
The entire purpose of building a company is to grow it, and that's why VCs invest. So, you ought to have people working for you that help you grow, to get somewhere. REGARDLESS of the state of the economy. In other words, why was it okay for lunkheads lauded by the tech blogs to hire dozens of people they didn't need 18 months ago, but not okay for them to hire them today?
If someone is adding real value to your team, helping you grow share and get where you're going, then hire them. If they don't, then don't.
The current "lay people off" craze ought to be replaced with a long term "hire good people you can afford" mantra, I think.
Squidoo hasn't laid anyone off, and we're really proud of that.
As to why hire so many people, though I generally disagree with it the theory is land grab. Get there before your opponent does. Personally I think Facebook's success, despite coming to the party well after MySpace shows that is overrated. Same with Google/Yahoo, YouTube/Google Video. All of those became competitive with or totally conquered much better-funded rivals who were there first, even with a network effect.
Yes, it does seem that careful planning and frugality have only recently come back into vogue out in Silicon Valley.
Boom times or bust, every startup should have a simple, huge, boldly lettered sign on the wall (or tattooed on the CEO's forehead):
Live to fight another day.
As always, common sense is a trade secret.
(i) Pre revenue companies have zero inflow, so can only have zero burn rate with zero outgoings - in effect they need to hibernate, and that implies they can no longer Carpe the Diem :)
(ii) Even those with revenue often cannot function and simultaneously build a business with the staff they can afford at zero burn.
But take your point - there is an interesting game theory here, in that if all other VC's are losing their heads, this is perhaps the time to give your startup its head - get that industry giant position sorted now, it'll never be cheaper to do.
@ Fred - is the 18 month runway the current "best guess" for time in the tunnel then?
The thing that boggle my mind about some of these layoffs is how big some of these companies are in terms of headcount. Seesmic laid off 30%, and that was 7 people. Seesmic had more than 20 headcount? Doing what?
If you stay lean in good times, bad times hurt much less.
As a heuristic for follow-on financing, it could also take into account capital deployed (size of circles?), as sunk costs are a definite worry in the "middling third" of a fund. Gotta recoup some of that cash and incremental multiples might actually be attractive.
so you can either be a consistent, conservative, coot - and look small in good times. or constantly adapt after the fact - and look like a presidential candidate. either way you win - and lose. and the more learned system evolves towards a more complex "crisis"
A couple questions:
1. Do you think any startup that is laying off less than 33% of its team is really doing a layoff? Or are they just getting rid of the deadwood? 33% layoffs give you a 50% increase in runway (assuming most of the burn is from headcount and everybody has the same salary.) Anything less than a 50% increase in runway seems too small. What do you think?
2. Is this matrix equally worthwhile in "good times"? Your post focuses on extending runway through revenue and internal investors. In good times, you would add external investors to the list, but I think the matrix is equally worthwhile.
I think the matrix works in good times and in bad but is particularly useful when financing is hard to come by.
A layoff is a layoff in my book. I hate to see them happen whether its one employee or thousands. I don't think there are any metrics that make sense in the abstract
This works even if you are bootstrapping because you'll go through cycles, even when you're bootstrapping you go into burn rate the scales just change.
$200k x 18 months is $3.6mm which is the most that our fund could possibly
fund ourselves if we had to do that to keep a promising company alive for
the next year and a half
Frankly 18 months might not be enough but that's the longest horizon I can
think about in the VC business
Hope that helps
This is a static view of any situation of a company.
In business choices have to be made where to invest in:
- Increase marketing spending for more lead generation
- Decrease marketing spending using other channels
- Increase sales force for closing more deals
- Decrease in sales force in order ot survive or become an OEM supplier
- Develop new products
- Discontinue existing products for less support costs
Investors look for future revenues and earnings, not the current situation, and that is what drives entrepreneurs too.