More from @pmarca
A tweetstorm from
4 years ago — @pmarca
1/Cash burn rates at startups: Recently @bgurley and @fredwilson have sounded a vivid alarm --
2/I said at the time that I agree with much of what Bill says (
and I want to expand on the topic further:
3/New founders in last 10 years have ONLY been in environment where money is always easy to raise at higher valuations. THAT WILL NOT LAST.
4/When the market turns, and it will turn, we will find out who has been swimming without trunks on: many high burn rate co's will VAPORIZE.
5/High cash burn rates are dangerous in several ways beyond the obvious increased risk of running out of cash. Important to understand why:
6/First: High burn rate kills your ability to adapt as you learn & as market changes. Co becomes unwieldy, too big to easily change course.
7/Second: Hiring people is easy; layoffs are devastating. Hiring for startups is effectively one way street. Again, can't change once stuck.
8/Third: Your managers get trained and incented ONLY to hire, as answer to every question. Company bloats & becomes badly run at same time.
9/Fourth: Lots of people, big shiny office, high expense base = Fake "we've made it!" feeling. Removes pressure to deliver real results.
10/Fifth: More people multiplies communication overhead exponentially, slows everything down. Company bogs down, becomes bad place to work.
11/Sixth: Raising new money becomes harder & harder. You have bigger bulldog to feed, need more and more $ at higher and higher valuations.
12/Therefore you take on escalating risk of a catastrophic down round. High-cash-burn startups almost never survive down rounds. VAPORIZE.
13/Further, to get into this position, you probably had to raise too much $ at too high valuation before; escalates down round risk further.
14/Seventh: Even if you CAN raise an up round, you are increasingly likely to incur terrible structural terms like ratchets to chin the bar.
16/Eighth: When market turns, M&A mostly stops. Nobody will want to buy your cash-incinerating startup. There will be no Plan B. VAPORIZE.
17/Finally, there are exceptions to all this. But if you're reading this, you're almost certainly not one. They are few and far between.