In a recent article in VB (Venture Beat) this paragraph caught our eye:
“One of the definitions of sustainability is that something is “able to be used without being completely used up or destroyed.” A sustainable startup does not burn through its entire venture investment with the idea that more will be available in the future. It doesn’t base its business model on volume of unpaid users. Rather, it justifies its value through a core market of paying users, those who find enough value in its services to justify paying real money to use it again and again.”
This together with the recent VC Alarm going off by Bill Gurly in the WSJ and Marc Andreessen on Twitter – everyone is talking about over valuations, ridiculous spending and burning, well, out. Did this round of excitement catch your startup off guard or are you prepared with answers?
Venture Capital Bubble?
The question is are VC’s getting tired of portfolio companies that are not building a real business fast enough, generating profits and producing real value?
With the rumors going around that the investment world is now in a bubble, it’s time for startups to investigate their burn rate, market share and revenue model before going running to the Valley, Alley, or Wadi for investments.
How are you calculating your Burn Rate?
So there are many ways to calculate your burn rate, the first and simplest way is, well let’s say that you had 1 Million in the bank on January 1st and on September 1st you had 500,000 left in your account your monthly burn rate would be 500,000 / 8 = 62,500.
Burn Rate = Total Cash Position Change/Specified Time Period
Now let’s bring in a few more factors. How long will it take for you to get to Cash 0 Date? How much money do you have in the bank for “burning” with no other funding or income coming in? If it is going to take you less than one quarter – start looking at your revenue projections!
Time Before Cash Runs Out = Cash Reserves/Burn Rate
This date sends off the red light to your investors!
If your product/software/tool is ready to market, have you factored in your new sales and marketing hires? When working in the startup realm you must remember that your burn rate will increase before your revenue is in from the first sales. Work closely and as accurately as you can with your quarterly and yearly forecasts.
For more definitions and burn rate calculations this is a good read: What is the Right Burn Rate at a Startup Company?
Pre Investment Tips
Whether or not we are heading to an explosion, VCs are getting extremely selective. Here are some tips for making sure that your startup will be on the “in”, sustainable, attractive, and a worthwhile investment for your favorite VC.
Watch your cash flow!
If you have raised some funds through angels, accelerators etc., be careful of your spending!
Hire smarter, Co-founder even smarter– it’s all about the team!
Find a way to generate cash faster
Be prepared for rapid growth – scalability
Join an accelerator, incubator or enlist a tech evangelist
Demonstrate market share – start getting customers
Consider a round of crowdfunding
Optimize your pitch!
Are you on the road to burn out or have you forecasted your spending lean, mean, and clean?