“No one’s fearful, everyone’s greedy, and it will eventually end.”1 Startup companies are burning through cash at unsustainable levels. Almost all failed startups cease to exist because cash runs out, and nearly all startups get close to running out of cash at some point, regardless of outcome.2
Every startup company is fueled by cash investments.3 Startup companies spend this cash in order to spark initial growth. This spending of cash is called the “cash burn rate.” More specifically, the cash burn rate is the amount of cash that a company consumes each month in order to continue operations.4 Investors look at this cash burn rate to see how efficient and effective the business is operating.5 A low cash burn rate, typically less than $50,000 per month, means the company is spending the money wisely and provides enough runway to build an initial revenue stream and customer list.6 It is wise for companies to maintain a low cash burn rate.7 Recently, there has been a trend diverting from this generally accepted principle.
Burn rates for companies are the highest now since 1999, just before the dotcom bubble burst.8 This excessive spending is partially due to the ease in which startups can acquire capital.9 With so much money being thrown around, companies continue to spend more and more money to stay competitive.10 The money is there to be spent, so companies are increasing their burn rates to spend it.11 People are ignoring the reality that their business is losing millions of dollars a year because the money coming in has sparked an overwhelming sense of optimism.12 Companies are using the huge sums of money to hide serious flaws in their business models.13 The high burn rate prevents companies from adapting quickly to market changes, creates a hiring frenzy leading to bureaucracy and mismanagement, and creates an illusion of wealth and relief causing employees to relax their intensity and hard work.14
If companies are continuously spending more money than is sustainable, investors will stop investing in them. Larger companies will not buy startups with high burn rates and eventually the startups will be extinguished.15 Burn rates are not only sky high all over the U.S. startup sector, but also overseas in China.16 If the unsustainable burn rates continue, once investors begin to pull out of the market, the well will dry up, and the companies running on empty will disappear into oblivion.
Jay Yarow, One of the Smartest VCs of All Time has an Ominous Warning for the Tech Industry, Business Insider (Sept. 15, 2014, 7:41 AM), http://www.businessinsider.com/bill-gurley-silicon-valley-is-taking-on-too-much-risk-2014-9. ↩
Chris Johnson, Here’s Where Your Startup’s Cash Went, Forbes (Nov. 18, 2013, 9:14 AM), http://www.forbes.com/sites/chrisjohnson/2013/11/18/heres-where-your-startups-cash-went/. ↩
Mark Zwilling, Startup Runway Length Depends on Your Burn Rate, Startup professionals (Oct. 5, 2014 6:30 AM), http://blog.startupprofessionals.com/2012/02/startup-runway-length-depends-on-your.html. ↩
StartupDefinition, http://www.startupdefinition.com/burn-rate (last visited Oct. 3, 2014). ↩
Zwilling, supra note 3. ↩
Yarrow, supra note 1. ↩
Patrick Clark, It’s (Still) Getting Easier to Raise Money for a Startup, Bloomberg Businessweek (June 9, 2014), http://www.businessweek.com/articles/2014-06-09/it-s-still-getting-easier-to-raise-money-for-a-startup. ↩
Storm Clouds, AVC, (Nov. 12, 2010), http://avc.com/2010/11/storm-clouds/. ↩
Yarrow, supra note 1. ↩
Alyson Shontell, Another Top Investor Sounds the Alarm, Business Insider (Sept. 25, 2014, 3:58 PM), http://www.businessinsider.com/marc-andreessen-on-startup-burn-rates-worry-2014-9. ↩
Burn Baby Burn, AVC (Sept. 16, 2014), http://avc.com/2014/09/burn-baby-burn/; Nina Xiang, Warning! Watch Out For a China Tech Bubble Burst, Forbes (Sept. 25, 2014 1:59 AM), http://www.forbes.com/sites/ninaxiang/2014/09/25/warning-watch-out-for-a-china-tech-bubble-burst/. ↩