Money in the Bank vs Burn
With the markets down significantly, financings (at least at the later stages) slowing down, and inflation and interest rates on the rise, perhaps now is a good time to talk about your burn rate. Hopefully, you took advantage of the robust financing markets of the past few years to put some money on your balance sheet. Perhaps you raised at what historically have been very attractive valuations (we certainly have companies in our portfolio that have raised well, well above the historical averages).
With that as the backdrop, it’s probably a good time to remind you that the amount of money you have in the bank doesn’t have to dictate your burn rate. Your underlying business metrics should.
Dividing the amount of money you raised by 18 or 12 months (a general rule of thumb for how soon you’d want to be back in the market) doesn’t necessarily work if you raised a lot, at a high valuation, and still have a few things to work out in your product, go-to-market, etc. Your burn should be based on the unit economics of the business, the fundamental core metrics of the company, taking into consideration your balance sheet and financing prospects. Particularly as companies headed into budget season at the end of last year, it seemed like there was an almost universal temptation to increase burn in 2022. Maybe it’s the rise of the $100M seed round. Or maybe it’s that the venture world seems awash in money (even despite the broader market pull-back). But there seems to be a feeling of free money, perhaps associated with the trend of decoupling of a company’s core, underlying metrics from their proposed burn rate. There are plenty of companies – and we have many in our portfolio – that are well-positioned to increase burn because they have well-established payback metrics along with a strong enough balance sheet and growth rate to support increased spend. But be careful if that’s not you. It’s unclear how far down the financing stack the current pull-back in public markets will reach, but if history is a guide, what starts with a slow-down in late-stage financings will eventually trickle down to Series C, B, A, and beyond. Looking at how companies raised in the past two years is likely not the best indication of your chances of raising money now (or later this year, or even next year). Hopefully, the markets will bounce back some. But don’t bet your business on it. Instead base your burn on your go-to-market readiness, your ability to pay back your marketing and customer acquisition spend, and a reasonable assumption about where your business needs to be in order to raise your next round of capital. Use time and capital to your advantage, accelerating product development as needed, gaining valuable insight on your go-to-market motion. Then, when you’re really ready to hit the gas, use the money that you’ve raised to do that.