Andreessen: High burn rates risk more than just running out of cash
From The News Desk
Earlier this month, Benchmark’s Bill Gurley and Union Square Ventures' Fred Wilson weighed in on the biggest red flag in Silicon Valley. Surprisingly, it wasn’t rising valuations that had the two venture luminaries worried, but swelling burn rates and the implied lack of fear and pragmatism that they signaled among both founders and the boards and investors that back them.
Today, Marc Andreessen* weighed in on the issue in a classic Tweetstorm. From @pmarca’s perspective, burn rates are indeed a major issue, but not simply because it makes running out of capital far more likely. Rather, Andreessen is worried about the institutional bloat and false sense of success that often result when companies spend lavishly.
Andreessen also predicts that the good times and easy money that support this kind of spending won’t last forever. Unfortunately, like the burst of the real estate bubble in the middle aughts, these shifting conditions are likely to catch many first time entrepreneurs by surprise. And when it does, "we will find out who has been swimming without trunks on: many high burn rate co's will VAPORIZE," Andreessen says, paraphrasing a famous Warren Buffet line.
He ends his screed with an appropriate, yet simple warning: "Worry."
As I wrote earlier this month,
This is a obviously a loaded discussion and one that may preclude a clear cut answer as to whether burn rates are too high that can be applied to all companies. ... But where Gurley and Wilson [and now Andreessen] seem to agree is that this spending needs to be commensurate with the return on that capital that the company can reasonably expect generate independent of the infusion of future rounds of venture cash. There will always be those that argue that Silicon Valley is in a bubble, or that startups valued in the multiple-millions of dollars are out of touch with economic realities. But when [three] of the luminaries of the industry begin to agree, and not only agree but do so publicly and loudly, it may be time to sit up and take notice.Here's Andreessen's Tweetstorm in full:
1/Cash burn rates at startups: Recently @bgurley and @fredwilson have sounded a vivid alarm -- http://t.co/xT4cr4mk5G http://t.co/2BfoS9t3AW
— Marc Andreessen (@pmarca) September 25, 2014
2/I said at the time that I agree with much of what Bill says (https://t.co/Yizp0Zr64F), and I want to expand on the topic further:
— Marc Andreessen (@pmarca) September 25, 2014
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.
— Marc Andreessen (@pmarca) September 25, 2014
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.
— Marc Andreessen (@pmarca) September 25, 2014
5/High cash burn rates are dangerous in several ways beyond the obvious increased risk of running out of cash. Important to understand why:
— Marc Andreessen (@pmarca) September 25, 2014
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.
— Marc Andreessen (@pmarca) September 25, 2014
7/Second: Hiring people is easy; layoffs are devastating. Hiring for startups is effectively one way street. Again, can't change once stuck.
— Marc Andreessen (@pmarca) September 25, 2014
8/Third: Your managers get trained and incented ONLY to hire, as answer to every question. Company bloats & becomes badly run at same time.
— Marc Andreessen (@pmarca) September 25, 2014
9/Fourth: Lots of people, big shiny office, high expense base = Fake "we've made it!" feeling. Removes pressure to deliver real results.
— Marc Andreessen (@pmarca) September 25, 2014
10/Fifth: More people multiplies communication overhead exponentially, slows everything down. Company bogs down, becomes bad place to work.
— Marc Andreessen (@pmarca) September 25, 2014
11/Sixth: Raising new money becomes harder & harder. You have bigger bulldog to feed, need more and more $ at higher and higher valuations.
— Marc Andreessen (@pmarca) September 25, 2014
12/Therefore you take on escalating risk of a catastrophic down round. High-cash-burn startups almost never survive down rounds. VAPORIZE.
— Marc Andreessen (@pmarca) September 25, 2014
13/Further, to get into this position, you probably had to raise too much $ at too high valuation before; escalates down round risk further.
— Marc Andreessen (@pmarca) September 25, 2014
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.
— Marc Andreessen (@pmarca) September 25, 2014
15/That nice hedge fund investor willing to hit your valuation bar? Imagine him owning 80% of co after down round. How nice will he be then?
— Marc Andreessen (@pmarca) September 25, 2014
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.
— Marc Andreessen (@pmarca) September 25, 2014
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.
— Marc Andreessen (@pmarca) September 25, 2014
18/Worry.
— Marc Andreessen (@pmarca) September 25, 2014 *[Marc Andreessen is a personal investor in Pando]