Andreessen Goes on Tweet Storm About Burn Rates, Says to Worry

1/Cash burn rates at startups: Recently @bgurley and @fredwilson have sounded a vivid alarm -- http://online.wsj.com/articles/venture-capitalist-sounds-ala...

2/I said at the time that I agree with much of what Bill says (https://twitter.com/pmarca/status/511617992757506048 …), 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.

The blog post author then goes on some further back and forth about specifics.

Maybe they'll be a little more careful about who they give their money to next time.

edit: To put it a little more kindly, if startups without viable business models keep getting gobs of money maybe the problem isn't the startup!

Warning: pedantic.

Adding people increases communication overhead quadratically, not exponentially. To see why, consider the complete graph on n vertices (people), K_n. The number of edges (lines of communication) in K_n is n(n-1)/2, i.e., proportional to n^2.

Just a few months ago I listened to a principal at a VC firm in NYC talk about how things aren't going to change anytime soon because a bunch of firms just raised new funds. Now he was primarily talking about seed rounds and as far as I can tell the concern about burn rates is targeted more at companies like Uber & Lyft that have raised nine figures. At the very least there appears to be a different climate around seed stage investments than there is around big growth stage C & D & beyond investments. But let's say the big late stage companies go up in smoke and there is a new reluctance to invest at later stages. Is there then an entire generation of companies that received seed funding when the market was hot that are now on quiet death marches? I suppose that's the disaster scenario.

What's funny is that a founder of an unprofitable VC backed startup generally still makes substantially more money than most people. What does it matter if they're spending a ton? The people who ran Groupon into the ground walked away and got other jobs, it wasn't their money...

This sounds to me like an outgrowth of that. "Can this little bit of software really be worth THAT much?" When it sparks exponential growth and enables a company to be active in a global marketplace with a handful of employees, yes, it absolutely can be. But with a voluntarily blinded eye turned to the actual value of software, everything looks the same. An app to waste a few hours in entertainment, or a system to automate part of customer service? Which one can make a ton of money?

He may be quite right though. I've lost track of how often I read stories about a startup and then am absolutely gob-smacked at the number of employees they bring on. They start a project that could be easily and competently handled by maybe 15 people, and they hire 1500. What most of those people are doing is anyones guess, probably marketing and design work that should have been done by contracted remote-work freelancers I suppose. They continue ignoring everything and pretending like this is 1975, like offices are something more than a gigantic drain on efficiency with no payoff. And they plunk themselves down in Silicon Valley, paying $28000/mo to rent an efficiency apartment above a garage. The actual WORK, the production of value, seems completely ignored next to the rush of "playing the game."

If there is an invisible hand guiding the market, we will see "companies" as such evaporate eventually. They no longer offer any value. They used to offer almost all the value, by solving the problem of distribution, both of work to workers and product to customers. Thanks to the Internet and software, distribution is a solved problem. It's nearly worthless because anyone can do it. All that efficiency that companies could afford while standing between a worker and an end customer, skimming 90% off of every transaction between them, is going to become their death.

Hooking workers up with people who need the product of their work will be handled by software, putting together teams automatically, managing reputation and portfolios to provide good fits to whoever needs a team of a certain type. Without companies there to take almost all of the value being exchanged, workers will find it only necessary to work occasionally. The massive productivity improvements that have occurred since 1980, like a secretary going from being able to answer 20 letters a day to handling 300 emails before lunch, which were collected exclusively by the company owners and upper management will make it so terribly easy for people to make a decent living without working much. And when people do work, they'll do it from home because there's simply no reason to gather them together in the same building which costs more and lowers their productivity. For work that requires heavy tools and things of that nature, I expect people will open community workshops where people can lease workspace and equipment.

The industries where the service actually HAS to be carried out in person have proven fairly resistant to takeover by small numbers of large corporate concerns. There are always independent plumbers, hairdressers, and restaurants everywhere. Thanks to the Internet, essentially everything escapes from this need for fragile centralization.

Just ignore me, I grew up online in the 1990s...