Burn Baby Burn

Andy sent me a WSJ piece with Bill Gurley yesterday. I don’t like to link to paid content so here’s a good Business Insider summary of the article that is open for anyone to read.

Regular readers know that I’m a huge fan of Bill’s. He’s as smart as they come and I generally agree with him on things. As I was reading the WSJ piece, I found myself nodding my head and saying “yes”, “yes”, “yes”.

The thing I like so much about Bill’s point of view is that he does not focus on valuations as a measure of risk. He focuses on burn rates instead. That’s very smart and from my experience, very accurate.

Valuations can be fixed. You can do a down round, or three or four flat ones, until you get the price right.

But burn rates are exactly that. Burning cash. Losing money. Emphasis on the losing.

And they are indeed sky high all over the US startup sector right now. And our portfolio is not immune to it. We have multiple portfolio companies burning multiple millions of dollars a month. Thankfully its not our entire portfolio. But it is more than I’d like and more than I’m personally comfortable with.

I’ve been grumpy for months, possibly for longer than that, about this. I’ve pushed back on long term leases that I thought were outrageous, I’ve pushed back on spending plans that I thought were too aggressive and too risky, I’ve made myself a pain in the ass to more than a few CEOs.

I’m really happy that I’m not alone in thinking this way. At some point you have to build a real business, generate real profits, sustain the company without the largess of investor’s capital, and start producing value the old fashioned way. We have a number of companies in our portfolio that do that. And I love them for it. I wish we had more.

#VC & Technology

Comments (Archived):

  1. maybe it was msg :)

    1.Copy WSJ Title ‘2 Paste WSJ Title in Google News 3. click link4. read article

    1. fredwilson

      yeah, that’s how i got it too. but i did not want to put that in the post

      1. Ed Freyfogle

        Would be interested in your thoughts on the Guardian’s new membership model, specifically designed to keep the content freely available https://membership.theguard

        1. fredwilson

          I used to think and write about this topic a lot. I’m fine with monetizing but I think you have to keep the content free and open or your audience will dwindle and eventually you will be irrelevant

        2. PaulLomax

          The Guardian may as well just put a donate button on the site. The only benefit in the current membership offering is a warm fuzzy feeling…

          1. Ed Freyfogle

            Asking for donations is a legitimate strategy, see wikipedia. It’s day 1 of the new membership, surely it will get more comprehensive over time. I personally find it much more compelling than NYTimes, WSJ, etc.

  2. William Mougayar

    Yep, the sky is not the limit, although it felt that way in 1999. Bill Gurley pointed to some real warning signs.Today’s ecosystem is a lot more resilient than in 1999, but the last thing we want is for notable companies that were funded with lots of money to fail. It’s the psychological domino effect I’m worried about.

    1. fredwilson

      it’s not just failing. it’s underperforming as an investment (for both the founders, employees, and investors) because of all the cash they burned through to get to exit.

      1. Justin Zollars

        It sounds like the fundamental problem is too much cash. Do you think increasing interest rates would reduce our risk? Is this even relevant? Is VC money totally private? Or does this flood of cash come from banks as well?

    2. Visakan Veerasamy

      Yeah, that’s what troubles me most, too. It’ll slow everything down, which will be quite sad.

    3. Justin Zollars

      It would cool the San Francisco real estate market at least.

  3. Duncan Logan

    Many SF Landlords are now asking for a 1yr deposit and long lease at an all time high rent. Selling equity to raise cash to give to a Landlord to hold as deposit in a market at <5% interest seems like a broken model. Office as a Service is coming but not fast enough for this cycle.

    1. pointsnfigures

      seems like commercial real estate ought to be disrupted….

      1. Brad Dickason

        The problem (imho – having seen the same thing in NYC) is not the companies in real estate, but rather the lack of inventory. SF and NYC both struggle to provide enough housing and office space for the massive influx of workers coming to their cities.Rather than disrupting commercial real estate, I would focus on enabling remote teams so you don’t have to be located in a place where inventory is incredibly short.

      2. sigmaalgebra

        Solution: Move to a US city of 30,000 to 300,000 that has all or nearly all you want and otherwise is not horrible. Done.

    2. sigmaalgebra

      Lesson: Don’t be in SF. Done.

      1. PhilipSugar

        Wow that is your shortest comment ever. Also one of your best!

        1. JamesHRH

          Siggy has gone pithy. Love it.

      2. LE

        The price you pay for office space is not just for office space. Same as the price that Starbucks pays for a good location is not just for square feet for machines, counter and seats.A good location (in the case of Starbucks) means they have a steady stream of customers that exists simply because they are located in the right place where those customers are. [1] So you (I’m sure) could easily calculate the marginal value (is that the right word?) of SB paying $50 per sf vs. paying $25 per sf or whatever the numbers are.Likewise doing a startup in SF at 100x the price of Charlie’s beloved Lancaster PA means you get much more than square feet. I don’t even have to go into all the advantages. 100x is made up number for the point of this comment btw.Mathematically though it can be almost certainly partially quantified and reduced to a close approximation as a number.My dad used to make fun of businesses with fancy offices. When I went out in the world of course I noted that those offices in fancy places had better quality people working for them than my dad did. So they saved on labor. So the rent and the nice furniture got them better people at a lower cost then the people who would work in my dad’s shithole of an office in the wholesale district. (General principle I haven’t done the math). Also reason why people work for banks for jack squat as well.[1] So they save on advertising. Or I should say a new startup coffee shop saves on advertising. Money they would have to spend to bring an equivalent number of customers to a street off the beaten path, if that is even possible. So rent = advertising and marketing.

        1. sigmaalgebra

          Math alone has essentially no truth or results (outside of math). Instead, sometimes math can take some assumptions and produce conclusions. No assumptions, then no conclusions.For applying math to SF office space lease terms, we’d need some assumptions.I can guess why in some SF locations high lease rates might be okay for SB and, indeed, many other businesses.But for a start up, say, roughly what is considered at AVC, that is, information technology where we write code, the app uses the Internet, and the Internet is also used for distributing the software, it would take some assumptions and analysis to evaluate SF office space lease terms.For my project, right away I’d say to SF, no way. Instead I’d look for a place with, say, a university not too far away with an okay or good computer science department, good Internet service, good, not too expensive electric power, not horrible weather, and good infrastructure, say, schools, churches, hospitals, roads, retail outlets, FedEx/UPS service, okay to good in the arts, lots of forests and farm land, maybe mountains and/or lakes or an ocean close by, etc. For office and/or server farm floor space, I’d look for an old factory or warehouse, buy it with a mortgage, clean it up, fix it up, pretty it up, and start to use it.Then I’d be (will be) willing to do some training of people I hire. One approach is the F. Brooks idea of chief programmer teams. E.g., I won’t expect them to hit the ground running with five years of experience with the latest version of iOS and have just done three projects just like the one I want to put them on.And I won’t ask them how many golf balls will fit into a school bus. And I won’t ask them what their favorite programming language is and reject them unless they name the language we are mostly using just now. And I won’t insist that they give me some concocted nonsense about all the really fantastic reasons they want to work at my company and all the really great things they can do for us. I will care nearly as much about their ability to document some software as to write it.I’d want to have the employees ‘compensated’ in some of the most important ways — able to buy a house, okay to nice, have late model cars, do well in family formation, do well in savings, be able to take okay to nice vacations, have some interests outside work, e.g., arts, sports, PTA, church, gardening, etc.So, for these criteria, there are lots of places in the US, E to W, N to S. SF, LA, Chicago, Boston, NYC, etc. lose out.Or, shorter, as I wrote elsewhere in this thread, pick a US city of 30,000 to 300,000 that has all or nearly all you want and otherwise is not horrible.No math involved.

  4. Lee Blaylock

    Smoke, meet fire….There is a strong correlation b/t excessive valuations, a % ownership an institutional investor wants and how much $$$ is going into too many nascent companies. The funds, esp later stage, are making scores to hundreds of millions available at relatively cheap equity that fan the flames and too many VCs are happy to participate with the new valuations to report to LPs. There are many examples but Box.net is the first one coming to my mind in terms of a business blowing cash w/out really proving a real business model there. Additionally, the public markets aren’t very attractive right now and, outside of yield, investors are looking for more than what most prognosticators believe public equities have left in the tank, esp given IPO valuations and missing out early on. I think MSFT went out at ~$400mm. There’s a lot disjointed with the venture / public markets today relatively to historical norms. Anyone looking sees smoke and we know the fire is coming, but no one really knows when.

  5. Ryan Laubscher

    There was an excellent post written by Mark Suster back in July 2013 that expressed a very similar sentiment – he titled it “Why You Need to Ring the Freaking Cash Register”. Other than the extreme outliers, good businesses tend to get to cash flow positive a lot quicker than other businesses. And when economic conditions yo-yo into a state where cash becomes a scarce commodity for businesses needing it to keep running, it’s those great businesses that tend to be able to survive and then take advantage when the yo-yo snaps back up again.http://www.bothsidesoftheta

  6. Parker Conrad

    As an entrepreneur I’m never sure how to react to articles like this and Bill Gurley’s. Saying “people burn a lot of money” isn’t terribly helpful. There are businesses where burning money — even millions of dollars per month! — makes good sense in order to grow more quickly.What’s the sign in your opinion that a company is burning too much? Understanding this is always complex and nuanced, etc, what rules of thumb do you propose? Is it about the $ burned / month? The runway remaining? Whether the current plan brings you to profitability without additional infusions of investor capital? For SaaS companies is it about the payoff period for sales and marketing investment? How, specifically, should companies be looking at this beyond a general sense that things sure feel frothy out there?

    1. fredwilson

      well a simple measure might be how much much value you are creating each year divided by how much cash you are burning each year.if it is not 5x or 10x, then you might be burning too muchif you are burning $100mm a year, as some companies are, then you’d better be creating $500mm per year in incremental valueyou know what i mean?

      1. Steven Kane

        great way to think about it – thank you

      2. JimHirshfield

        Is there an accounting or financial term for that?Revenue / Burn = ??or is this otherwise known as:Cash Flow In / Cash Flow Out?

        1. fredwilson

          Return on investment

          1. JimHirshfield

            Doh! Don’t I feel stoooopid.

      3. Dave W Baldwin

        I figured you’d share this article. Keep the tough love going because in the end run if everyone’s cash register empties, the VC and Angel who has cash in the register will be better off after the correction in burn and valuations.

      4. anon

        How do you define value created? If it’s funded valuation then that’s easy to manipulate; in a frothy environment it’s easy to find greater fools that will ratchet up the valuation and make it seem like the company’s creating value when it might not be.

        1. fredwilson

          great point. you have to be intellectually honest to yourself. just because someone will pay the price doesn’t mean its worth that much.

      5. PhilipSugar

        That is a great way to look at it, and I agree with your point below.

  7. Nicholas Heller

    Fred. Thanks for highlighting this fundamental issue. What’s the number one reason startups fail? They run out of cash. Cash is king. At Fractal Labs, were building tools to help SMBs make more informed, data driven decisions. An outsourced, automated CFO analyst in the cloud. 🙂

    1. ShanaC

      so weird, I just heard of you at a party

      1. Nicholas Heller

        on fred’s blog — where party talk and the virtual grapevine converge =)

  8. tywhite

    If there’s one thing that was burned into everyone at Eventbrite (to the point of being a regular joke) it’s that “shit ain’t free.” Capital efficient businesses (which is not to say stingy or cheap) can withstand any market condition, and thrive in the toughest of times. Those are the businesses you want.

  9. Marissa_NYx

    If you’re backing companies that have bootstrapped their start, you get a different, focussed culture & attitude on burn rates and costs. It forces you to think twice about every cost item. You’re running as fast as you can to get traction, customers, product, team, everything aligned within tight costs. It’s not about frugality but more aligned to reality. We are in a privileged place to be working in and on our startups, treating investor money with respect is crucial to success. Maybe this way of thinking is old fashioned but I think it is necessary if you’re trusted to handle OPM.

    1. Sunil Founder Prijector

      Marissa i get laughed at from founders and investors when we talk about how little we are spending to build our company. Sometimes i tell myself “HELL” let me just go raise money and put it to work quickly. But building a strong business is super important. Hopefully our approach will help create value for employees…

      1. James Ferguson @kWIQly

        I was once told – a bank is someone who lends to you when you can show you don’t need it, an investor is someone who thinks you don’t need it but is not sure. Cash in the bank can be inflatedHappy paying customers mean more than all the above.

      2. PhilipSugar

        Remember this. All of the money that you spend (lose) has to be paid back. People somehow see OPM and forget this. Believe me. I have had exits. You will pay off every single dime and then more. If its a home-run netting investors more than 10x who cares. If its not…..it can hurt.Fred has a great comment buried below saying that if you are not generating 5 or 10x value for the money you are spending you are spending too much and you have to be intellectually honest with yourself about whether you are doing that. Now if you can hire a salesperson and they generate several multiples of their cost after a year in sustainable revenue, you should be hiring as many as you can. If they can’t? Well then.I see young people I know driving for Lyft and then taking Uber’s $500 bonus just for the $500. It certainly is a way to signup drivers, but is it delivering 5 or 10x value? Not sure. I’m sure in their mind it is.

    2. JamesHRH

      See comment above re: Wall Street, investor funds, respect.Raising big rounds and burning cash is the symptom, not the illness.

  10. Matthew S LaCrosse

    I will build you one, just reach out.

    1. fredwilson

      easier said that done. trust me on that.

      1. Matthew S LaCrosse

        Agreed. Nothing worth achieving in life comes easy, life ism’t easy. Strive for simplicity, program mindset, and regulate outcome. Chances are you won’t achieve the desired results unless you’ve traveled the less desirable route. Easy is for the faint of heart and weak of mind. Regardless talk is cheap and wildly annoying, words are mostly meaningless except to thy self or thru manipulation of interpretation. My statement holds true, I will prove – I will do.

  11. Alex Pack

    I wonder how much of this increase in burn rate is due to things like payroll and overhead vs. marketing/ad spend and subsidizing prices? If it’s the latter, I’m not sure what startups can do about it. The situation reminds me of Kevin Roose’s article in the NYMag about the glut of VC-backed profitless startups in the SF consumer space that are competing for market share by cutting margins into negative territory (SpoonRocket, the Uber/Lyft/Sidecar wars).Marketing/ad spend and predatory pricing is a prisoner’s dilemma. It makes sense for individual startups to outspend each other on marketing and underprice each other, but it’s a net negative overall. The game ends when the money runs dry or VCs push back on budgets across-the-board, but until then doesn’t it seem irresponsible to advise any startup to cut back on their own?http://nymag.com/daily/inte

    1. ShanaC

      Lean has created a generation of very undisciplined marketers.While I’m not going to comment on lyft vs uber (they may be working up the cheap channels) as a general rule most people can’t model where to steal from their own ad budget, despite this being a known for over 50 years in media buying and theoretically cheaper technology to figure out howedit: spelling

      1. Chris Heivly

        Not sure why “Lean” is the culprit here. I think it is a discipline issue related to too much “TechCrunch”.

        1. ShanaC

          I like the growth- hacker crowd. But tech crunch et al/growth/startuplanda) don’t know what the fundamental costs of marketing are and where they should be frontloaded/backloadedb) how they fit into lean ideology, which is pushed hard by Techcrunch et alc) how research works on what is/is not cost effectiveI would also say this applies to VCs as well – one of the reason fred is successful (though he hates it) is he markets himself well. Same with John Doerr in the 90s. People who understand the fundamentals of marketing (and marketing burn) and how they relate to startup growth tend to make good VCs because they can judge when there is over/under investment (and can push themselves/their investments into the public eye)

          1. Chris Heivly

            I like the growth-hacker model as well as it should align the customer development process with the cash of the business. That is why i think it more a discipline issue than a methodology issue.The problem becomes acute when the cash burn is not aligned with where the company is. Raising capital frequently feeds the mis-alignment and the company starts a “swing big mantra” with the cash. I mean that is what all of the unicorns did, right? Wrong.Managing the alignment of stage of business with marketing (customer development/growth-hacking) is what the founding team and investors should be discussing.

  12. Sunil Founder Prijector

    There are also lot of boot strapped companies like ours which are profitable and doubling sales month on month. The general mood among investors is raise money and put it to work quickly. Wonder what happened to the approach of building a solid business first and then scale super aggressively on top of that.

    1. sigmaalgebra

      > Wonder what happened to the approach of building a solid business first and then scale super aggressively on top of that.Answer: Equity funding is not for everyone!

    2. JamesHRH

      Scale matters here Sunil, as in – scale of your current operations.

  13. BulldogSpirit

    Beautifully put, Fred. Too many guys playing with other people’s money as though investors are idiots and the trade sale to a Google or Facebook was already a done deal. It’s supposed to be hard, and take time, and start-ups need to be more responsible with external capital….

    1. pointsnfigures

      you point out the danger of an ecosystem based on acquihire, not building value

      1. ShanaC

        the investors are hoping for that in many cases

  14. Kasi Viswanathan Agilandam

    whom r we blaming now? The start-ups or the VCs.What would a start-up do if they have poured in lots and lots of money?The answer is simple … spend. No one can blame them for that…They got evaluated 10x more than what they worth and got 10x more funded than they expected (of course they asked for 10x but were expecting only 1 or2x). They can'[t just wag their ass and sit on that pill of money… they have to spend it…. whom blame?I was taken aback when couple of months back …an e-com company in India got 1B investment….why ? because the competitor got 300m funding from X … what would both the company now do with that money? Spend. Not only just spend.SPEND IT COMPETITIVELY.What a competition we have brought into the market … competition on SPENDING … a new way of doing business.P.S. could not stop my whining

    1. fredwilson


      1. mike

        I’ll have to go with @Kidmercury on this one, monetary policy

  15. jason wright

    the longer the runway….

  16. JimHirshfield

    Grumpy. Ugh.

  17. Steven Kane

    If a meltdown comes one tragedy will be in the toll it takes on all the earnest hardworking team members of companies that have to downsize or shut down due to silly poor management or wacky expectations. And another toll will be on the many many teachers and firefighters and government workers etc, whose unions and pensions have allocated way too much capital to venture, drunk on promises of returns the industry knows perfectly well the vast majority of funds cant possibly deliver. But I’m getting to where I am no longer sympathetic to any of that. Caveat emptor. There’s been plenty of debate and transparency (though still too little) that everyone in the game of musical chairs knows they are playing musical chairs. If they have forgotten that occasionally the music stops, so be it. If they are willing to have a certain type of middle-person take away gargantuan compensation, guaranteed over many many years, regardless of outcome, well, thats not a secret, is it. Hunting unicorns? A more ironic use of language has never been deployed… except its not used ironically! 🙂

  18. RichardF

    I have seen this behaviour in so many start ups. Raise a big round, employ a layer of VP’s from “big business” and all that comes with them (personal assistants, expense accounts), people that were the only person in the HR department now become head with 4 assistants to actually do the work, take a lease on a building with enough space to fill your current headcount x3 because of course your next round is going to be even bigger.There is also pressure from new investors to actually spend the money you have been given because of course you need to scale ready for the extra 100 million users you are bound to be getting because you raised the round..

  19. johnmccarthy

    Thanks for this Fred. Every now and then it is useful to have everyone reminded that it isn’t as easy as it looks and that disciplined, mindful spending needs to be practiced in order to create value.

  20. awaldstein

    I’m with you.I’m also aware from experience that it costs much much less to start a company but more to build it than before. The thresholds for success are high and its pricey to get there.

    1. JimHirshfield

      That’s what’s gotten so many into a pickle…It only takes $X to start and ramp up a company. But when it’s a hot idea, got traction, or has proven founders, then the investors want to all get in. They over-subscribe and raise 2x to 4x (or more!) what they need.Founders do this just to get the brand name investors in.Investors just want a piece of the hot company. But that “piece”, in the form of equity that has no justification, is now an unnatural force on spending (“you got it; now spend it”). Oy!

      1. awaldstein

        The problem is not the founders or the investors to me as much as it is the challenges of the market at scale.Three years ago I was on a panel talking about minimum thresholds of traffic to run a media model. I think the math we did showed 1M uniques as the #. It’s more now.Getting discovered, building vast audiences is in almost all cases an expensive process. Not all, but most all.And as a smart friend told me the other day, the odds of doing so for a consumer product are no better than winning the lottery!

        1. JimHirshfield

          I agree with you more than you or @JLM:disqus know.Your point is well taken, and what I’m saying is that the cost to (try to) achieve the scale you refer to, is baked into my $X above.It’s all the extra cash that gets thrown at the startup that’s not directly correlated to the investor question: “So, how will you use this capital?”.

        2. sigmaalgebra

          > odds of doing so for a consumer product are no better than winning the lottery”Odds” don’t matter, only ‘conditional probabilities’ from conditioning on what else know.

          1. awaldstein

            Don’t understand the difference sorry.Talk to me as if I am a young child please.

          2. sigmaalgebra

            Probability theory is important stuff. E.g., if you flip a fair coin many times, then in the ‘long run’ you will get right at 50% heads — this is an intuitive statement but about as accurate as an intuitive statement can be, but there are rock solid theorems that make this statement totally clear. Mostly to heck with a fair coin, but this simple situation is close enough to a lot that is important in the real world to be quite serious. Net, probability is important stuff.Then there is ‘conditional probability’, and that’s where probability gets much more important. Conditional probability is how you best exploit additional information. Uh, in simple terms, that’s why we gather such information, to exploit it, essentially just via conditional probability.So, we need an example: Back to the movie ‘Wall Street’. We remember, the guy on the motorcycle at the airport asking the ramp worker what the destination of the airplane was — some town in Pennsylvania.Okay, there was an old steel company in that town. Now, what’s the probability the stock of that company will go up a lot tomorrow? Sure — zip, zilch, and next to zero. But, given that the guy on the motorcycle reported that the airplane, with the corporate raider, who had just had a fancy lunch, maybe a pound of truffles washed down with La Tâche, with some bankers and in his private jet was headed to that town in Pennsylvania, the probability of a big increase in the stock price was quite high. That is, the wording goes, the conditional probability the stock will go up given the report from the motorcycle was quite high. So, Gordon Gecko bought the stock of the steel company, or bought options, or whatever. What Gecko wanted, whether he knew it or not, was the conditional probability of the stock going up conditioned on the information from the motorcycle. To heck wit the probability; what was important was the conditional probability given the extra information. It’s the conditional probability should bet on, as if it were the 50% from the fair coin.Or, winning at casino blackjack? Not likely. If can do good work at card counting with a small deck and ability to adjust size of bet over a wide range? Sure, make a bundle until get an invitation can’t refuse to meet out back of the casino and discuss card playing. So, the conditional probability of winning given good card counting is nicely high.We understand area, say, in square inches. If you remember some calculus, you saw how to find area under a curve. E.g., the curve might be a semi-circle. Well, the way to do that was to partition the X axis into little intervals and above each one approximate the curve in the interval by a tall, thin box, Then for an approximation to the area under the curve, add up the areas of the boxes. As the intervals get short, the approximations converge to a limit deemed to be the area under the curve. All this was made really clear by B. Riemann and others.By 1900 or so, E. Borel saw some loose ends in Riemann’s work — in some pathological situations, it didn’t work. So, Borel’s student H. Lebesgue ‘disrupted’ the subject and made the little intervals on the Y axis instead of the X axis. In all the normal situations, Lebesgue got the same area as Riemann, but in the pathological situations Lebesgue still got a solid answer.Lebesgue’s work was called ‘measure theory’, and there is a book with that title on that subject by P. Halmos, right, an assistant to von Neumann at the Institute for Advanced Study and a student of J. Doob, long the main US guy in stochastic processes.Well, if look just right, Lebegue’s measure theory is a terrific mathematical basis (until then missing) for probability theory. So, in 1933 A. Kolmogorov wrote a nice paper that used Lebegue’s measure theory to create ‘modern’ probability theory.Well, Lebesgue was interested in a wildly careful treatment of areas, if you will, just ordinary areas (along with some really pathological ones). Then Kolmogorov said, consider a region of area 1. That’s everything can observe in probability (an experiment such as coin flipping). In this area of 1, consider the region T when the coin comes up tails, and the rest, the region H ,when the coin comes up heads. Then K. says, the probability of T is just its area, clearly between 0 and 1.Okay, let region A be the cases (we imagine a lot of trials) where the stock in the steel company goes up more than 10% tomorrow. Then we write the area of region A, that is, its probability, by P(A). Well, we know that P(A) is small, too small to bet money on.Now, let region B be where the guy on the motorcycle reports that the plane is headed for that city in Pennsylvania. So, presto, we are only interested in the part of region A that overlaps region B, and there we want what fraction of region B is the overlap. Or, now that we know that we are in region B, are we also in region A? Then the probability of the region of overlap is P(A and B); its fraction of the area of region B is P(A and B)/P(B); and this is the ‘conditional probability’ of observing A given that we know that B holds and is writtenP(A|B) = P(A and B)/P(B)If continue and make some more definitions building on P(A|B), can get some wild, profound stuff that in part says that conditional probability or ‘conditioning’ is the best way to make use of information. How ’bout that.Net, in practice, usually what we care about is not probability but conditional probability conditioned on what else we know. In particular it’s easy enough that the probability the stock will go up is low but the conditional probability given some additional information is quite high.For more, we will be into Markov processes, martingales, the astounding martingale convergence theorem (a candidate for the strongest inequality in mathematics), the Hahn decomposition, the Radon-Nikodym theorem, and much more.Now you are into a graduate course in probability. There has long been world class expertise at Courant; at Princeton, there has long been E. Cinlar. Berkeley has long been a leader in the US. Can also mention Stanford, Chicago, UNC, Hopkins. Really, though, generally France, Russia, and Japan take the subject more seriously than the US has.

          3. awaldstein

            Thanks!Hardly in terms a young child can understand though 😉

          4. sigmaalgebra

            You have a square with area 1, say, square feet. The stock goes up more than 10% tomorrow is an ‘event’, say, S. Think of event S as a region in the square. So region S has an area, 0 to 1 square feet.The ‘probability’ of event S is its area, and we write that as P(S).Let M be the event that the guy on the motorcycle reports that the airplane is headed for the town in PA with the steel mill.Now we are interested in the region common to both S and M. Now that we know that M is true, that is, event M happened, we want to know the probability that S is true exploiting that we know that M is true. So, we want to know what fraction of region M is also in region S. Now, the area of the region where S and M overlap is the probability of both events S and M being true and isP(S and M)So for the fraction of M where S and M overlap is justP(S and M) / P(M)and we call this the ‘conditional probability’ of S given M and writeP(S|M) = P(S and M) / P(M)What Gordon Gecko used when he heard from his guy on the motorcycle was P(S|M) and not just P(S).P(S) was low — the stock was a “dog with fleas”. P(S|M) was high. So, P(S) can be low while, for some M, P(S|M) can be high. Generally P(S) is useless and what we want is P(S|M) for whatever promising M we have.There is much more, but this is for five year olds who have some intuition about areas.

        3. ShanaC

          I was explaining this earlier to many people involving content marketing.:/

    2. ShanaC

      marketing costs and in some ways usability costs are higher than I have ever seen.

      1. awaldstein

        Build communities of vast scale is non trivial and the size of a non transactional user base to be solvent is just a really big number.

        1. ShanaC

          this is a math question and a people question. But the math side and gaining enough reach is expensive

      2. Mike Bestvina

        Which is largely consistent with Godin’s “Attention is a bit like real estate, in that they’re not making any more of it. Unlike real estate, though, it keeps going up in value.” because now that the attention has shifted to online, it means the value continues to go up and up. It’s also why advertising plays are so lucrative.

    3. LE

      but more to build it than before.Is that really the case? Seems the cost of things has gone down mostly. (With the exception of perhaps labor in certain areas and of course healthcare).But even with labor tremendous access to people who can offer all sorts of help ala carte and access to people and knowledge from all over the world.When I started a business in the early 80’s no such thing. Libraries, local paper help wanted ads were the norm – not even fax machines existed. Computer for a small company cost me $35k in 80’s dollars or so. No open source software. If I hadn’t been able to program it myself I would have been SOL paying someone else for software. (Non starter) Equipment repairs? $135 per hour (80’s dollars) for the repairmen. Today you could just pull up some youtube videos, order parts online and maintain yourself. Business loans iirc 12 to 15%? Etc.Buying machinery? Would you rather buy machinery today with ebay and access to sellers all over the US (and world) or back in the early 80’s where you had the local equipment dealer who held all the power and had exclusive territories? [1]Back then you had to print up business literature. Cheaper now you have a website to show your products.No comparison at all. List is endless.[1] Even in 1995 when I started another business and had to buy machinery I had to get in an airplane and visit companies with the equipment (several places) and stay at hotels over several days. Today I could do that all remotely via the internet. (I actually have films of me doing that back in the 90’s).

      1. awaldstein

        Yup–in my experience and amongst my piers.Competition for attention has never been more intense. Loyalty less. Cost of building a brand more.

        1. LE

          See now the barriers to entry in the old days were actually good!All these food brands that you see on those tv reality shows (watch Restaurant Startup CNBC if you can as one example). Like if its so easy for you to get shelf space at Whole Foods what happens when the next guy does the same thing next year and takes that shelf space away from you?Otoh at least if you get a network of delivery trucks and a route you have more of a barrier to others competing with you.Exact reason I never liked SEO. Rather not build a business with fixed overhead based on something that can disappear overnight on a whim. At least when I bought a yellow pages ad in the 80’s I was guaranteed that nobody could take it away (they gave seniority). [1] Or if you used trade shows back when trade shows mattered and you got a good booth a new guy could not just get that booth from you.[1] Ranking was size of ad and number of years in the book.

          1. awaldstein

            yup–brand is not important it is literally everything in the market today.

  21. Techman

    Oh no Fred don’t be grumpy! :)The last thing I’d want you to get stuck with is the grumpy old man stereotype 😛

  22. Tom Maffettone

    Having been there, I can personally attest to being a CEO of a company that was pushed by a VC to build faster, ran our burn to about $700K a month. I sat my board down and said this isn’t a business and may never be if we keep this attitude towards cash. I a few months later I stepped down out of my differences with the board. A big burn is fine for an agreed short term, but results come from making money. I fully agree today’s companies, many who didn’t feel 1999, are acting and being driven by big cash infusions. VC’s could help by reducing investments and supporting tighter financial plans. Plus, putting more focus on financial teams to drive better reporting to watch the hen house!

  23. pointsnfigures

    Yup, one guy I invest with has an opening question-What’s your burn rate? Begin quantifying risk from there. Unfortunately, we might be in a situation that spins out of control do to no fault of the VC community or entrepreneurs. The Federal Reserve has been on 0% interest rates since 2009. What happens on the day they realize they need to raise rates? Additionally, other macro forces will eventually impact the broader market with trickle effects into VC-European banks are in atrocious shape-loaded up with non-performing assets on their balance sheets. China is slowing down. I don’t foresee a 2008, or a 2001, but a 1987 type thing isn’t out of the question.Posts like yours and Gurley’s are great because if the community pays attention they feel uncomfortable. When investing, trading, etc you should never feel like you are sitting in a cushy seat.

  24. Tom Labus

    Alibaba IPO the top for this wave?Plus it’s always easier to spend cash than figure out hard stuff.

    1. pointsnfigures

      Great point. Spoke with an entrepreneur once that said they needed more cash. They hadn’t figured out product market fit yet-so cash wasn’t their problem.

  25. diymanik

    I had a friend of mine tell me that investors in Canada will expect you to detail how you’re going to spend all the money. I assume it’s standard across the industry, but isn’t it a bad idea to plan to spend all the money before you know for sure what it’s best spent on?

  26. JimHirshfield

    So…are we in a bubble? A 2001 bubble or one of a different nature/outcome?

  27. William Mougayar

    Despite your push-backs, what are some reasons that these entrepreneurs are still going through these excesses?

    1. Justin Zollars

      There was a pretty good comment above on this question. Related to Uber/Lyft SpoonRocket and others doing work for less than cost to win market share. It seems the problem is simply too much cash in the system. Money has become too cheap.

  28. Datum Lex

    Where do even get this kind of data? Both you and Bill’s points seem to be based on anecdotal evidence or a subset of the population of startups, like your own portfolio. How can you make such sweeping claims about startups in general?

    1. mike

      between benchmark and usv you don’t think they have a read on the market?

    2. fredwilson

      We see something like 20 or 30 companies a week come through our doors and pitch us and reveal financials to us. So does Benchmark

      1. Datum Lex

        Do you keep a historical record of their burn rates going back to the 90s?

        1. fredwilson

          yeah, it’s called my brain

          1. Amar

            Make sure it is backed up 😉

  29. mike

    The one thing that I’ve learned in venture is that you don’t make money in venture by playing conservative. if 2/3 of your investments generate little to no return, it doesn’t matter how the company goes to zero as long as the VC is not putting all of their eggs into one basket.

    1. fredwilson

      Yeah. Taking risks is important. But there is such a thing as too much

      1. pointsnfigures

        Calculated risk vs taking risk for risk sake

        1. LE

          Calculated risk vs taking risk for risk sakeTaking risk for risk’s sake is a property of the newly hatched. It’s a characteristic of people who read things (like those business magazines full of articles with stupid quotes of successful business people or blog posts) and operate that way without fully knowing what they are doing. Doing things that they don’t even understand because “well all of business involves risk”.”Calculated” in my mind means you know enough to make a decision and have properly evaluated the downside and upside. Doesn’t mean you are right but have given it thought.They don’t teach this in b school because they can’t. Because case studies don’t and can’t have all the details not anywhere near as simple as “so do you fire Charlies and get someone new in the Midwest territory or…”. Only thing that gives you seat of the pants is a great deal of time in the pilots seat.

  30. sigmaalgebra


  31. TeddyBeingTeddy

    Finally someone said it. Profit matters. Kudos to you Fred. Lots of real companies with real paths to profitability, but hopefully this deters many of those that truly have no plans for profits with a sole strategy of hope. Vanity points are fun, profit is funner. GREAT post.

    1. mike

      Profits don’t always matter…building something that has strategic value or some novel technology is often more important in the VC world

      1. TeddyBeingTeddy

        Mike – do you why gold is actually a dumb investment? It’s because it doesn’t generate cash. Look up the definition of investment. Buffet didn’t get to be the best investor in the world by investing in cash-burning endeavors. SV is FULL of smoke & mirrors. There are some real companies in VC, Fred is an investor in many of those. But most of the startups I know in SV are run by rich kids (rich parents) who don’t care if a company ever actually makes money. They just want to “do something cool”. They love to be in the game, in techcrunch, whispered about in Stanford comp sci classes. And according to nearly all the startups in SF…making profit isn’t cool. $5 to buy $1 of revenue…no problem!Profit pays that escalating rent. Profit is the goal. The rest is creative justification of an over inflated value for an empty business.

        1. Mike

          Well, I think Gold is a pretty good investment. I think of it more as a hedge or store of value. It may be slightly naive to believe that fiat currencies will never experience inflation that is destructive to wealth.So what’s wrong with doing something “cool”? SV is similar to other sexy industries (music in nashville, acting in LA, etc), where most of the wealth creation is generated by a small minority and there’s a big ecosystem trying to join that fraternity often times made up of wealthy kids. Who cares?

          1. TeddyBeingTeddy

            Mike I guess I just think a company that can find a way to be profitable is cooler than a company that can’t. And in my experience most of the SV startups are really cool but terminally unprofitable. My personal opinion.

        2. LE

          Buffet didn’t get to be the best investor in the world by investing in cash-burning endeavors.a) Buffet got his start and his foothold in another time and place.b) Buffet maintains his foothold because of who he is. He now operates and gets deals of a type that others wouldn’t be able to touch. Because of who he is.This is similar to Stephen Spielberg getting started in entertainment in the 70’s and what he is able to do post his first big hit (and today).Not to take away from anything either man has done, not my point. But you can’t necessarily clone what they are doing now if it were that way others knowing the roadmap would do the same. Same as me with domains good luck if you didn’t get started in the 90’s as I did and have 18 years of contacts and experience.

          1. TeddyBeingTeddy

            Can’t the same be said for all VCs? Fred Wilson gets [30] books a day because he’s Fred Wilson. Not everyone can be Warren, and not everyone can be Fred. But if you’re an ordinary guy like me, seems like the highest probability of success would be to work with profitable companies?

  32. Greg

    @fred>> “At some point you have to build a real business, generate real profits, sustain the company without the largess of investor’s capital”That’s an interesting comment for you to make since many of your largest exits did not have revenue or profits (Tumblr, Geocities, etc)

    1. pointsnfigures

      Tumblr will generate profits for Yahoo if executed correctly. It’s a great native advertising play. Yahoo could topple some big giants if they use Tumbler as an attack mechanism.

      1. ErikSchwartz

        “If YHOO did XYZ then they would suck less.”That is the story of Y! in the 21st century.

      2. JamesHRH

        Not so sure here.Tmblr is a large number of very small groups. Its highly fragmented even though it is huge.I think it makes large ad buyers heads hurt.

        1. pointsnfigures

          Who said they had to buy ads? Why not create them? It’s native.

          1. JamesHRH

            OK, buying a Tmbr campaign is a headache.

    2. jusben1369

      If you read the article referenced you’ll see that Bill does a good job pointing out that FaceBook and Twitter have kind of debunked the “Well they only are gaining eyeballs but have no way to monetize it” objections. It is a viable business model if executed effectively.

      1. kidmercury

        twitter hasn’t debunked it. their quarterly free cash flow and EPS are both negative. fb has proved it, so props to them in that regard. though FB is 5X the size of twtr which may be worth considering in this issue.

        1. fredwilson

          Bullshit Kid. Twitter has massive quarterly free cash flow. Its the non cash expenses, mostly options expenses, that cause them to report gaap losses. You can see it in the cash balances going up every quarter on the balance sheet even in quarters where there is no financing event

          1. Justin Singer

            A disagreement on whether to subtract non-cash comp when calculating FCF? History really does rhyme. 😉

          2. kidmercury

            cash flow on major financial sites is reported as negative: http://www.marketwatch.com/…you are saying all these outlets are incorrect?i don’t accept the notion that non-gaap accounting methods are entirely legit. sure, twtr earnings may be penalized under gaap because of stock issuances that do not impact cash they had to pay, but if the stock price was not as high, or if they did not hand out stocks, they would have to compensate in toher ways to retain key employees. gaap accounting may swing the needle too far, but non-gaap doesn’t swing it enough.either way, i’m not sure how you can say they have massive FCF. reported financials show they are negative. even if you look at the balance sheet, numbers, cash has been declining through 2014. there was a huge spike in Q4 2013 cash for twtr but that was the result of a financing event.i am only citing widely reported financials here. marketwatch, yahoo, wikinvest, google, etc all showing the same story, straight from the SEC filings. https://www.google.com/fina

          3. fredwilson

            from the cash flow statement in the most recent quarterhttps://www.google.com/fina…twitter had $124mm of cash flow from operating activitiesthat’s a lot of cash flowing from the business

          4. kidmercury

            as i’m sure you know better than i do, OCF does not include capital expenditures. i suppose it is debatable as to what metrics are the ones that are truly indicative, though i am far from the only one to view FCF as the most conservative and meaningful.

          5. fredwilson

            capex could be building out the SF offices, it could be servers, it could be anythingit could be a truly one time thing or it could be an ongoing thingone never really knows unless you can drill down and get the detailsbut even after spending something like $90mm on capex in the most recent quarter, they had a surplus of cash flowthey are most certainly not losing money on a cash basis

          6. kidmercury

            yes, capex can be for anything — there is always a promise to sell, especially in our current market conditions. FCF is negative, though, (http://ycharts.com/companie… ) so if you factor in the capex TWTR is burning cash. that is also why cash and short term investments have declined a bit in each of the two quarters reported thus far in 2014.of course they are also issuing a convertible bond to raise 1.3 billion or whatever the latest number is…..

          7. JamesHRH

            @kidmercury:disqus I think @fredwilson:disqus has you here.I agree. Twitter is a good business and it is established. And, it does not have the same kind of ‘boots on the ground’ global rollout to fund as something like Square (far less established, far more vulnerable market position).And, its not in the mezzanine bubble either.

          8. kidmercury

            as much as i love beefs this isn’t a beef so much as an observation of clearly reported numbers. twitter is FCF negative and is reporting losses based on GAAP standards. people can say GAAP is not relevant here, and they can say OCF is more important than FCF. both are controversial statements that many would reject (myself included), but sure, let’s accept them for the sake of discussion. twitter is still spending more than they take in and their declining cash balance illustrates this. that they are now doing a convertible bond issuance to raise 1.3 billion practically crowns them the champions of the bubble/ponzi game going on.

          9. kidmercury

            i think disqus ate my previous reply here — anyway yes, capex could be anything — there is always a dream to sell, especially in today’s environment. but they do not have a surplus of cash flow as FCF illustrates, and as the decline in their cash balance over the past two quarters illustrates also. so they are still burning cash (spending more than is coming in and thus resulting in a declining cash balance and negative FCF). of course it is not a problem in today’s environment as they are also doing a convertible bond issuance to raise over 1.3 billion……..

          10. fredwilson

            as i said before, that’s bullshitthey are producing cash in their core business and using it to buy things, like companies

          11. kidmercury

            you are basically saying math and numbers are bullshit. is it bullshit that they are spending more money than is coming in, and that their FCF and cash balance are negative as a result? you are disputing arithmetic if you believe that.

          12. Peter_Jan

            So Twitter is only ‘profitable’ if the investors ignore their dilution. And that ‘profit’ is less than the value of shares diluted. If Twitter would pay fully cash salaries then its FCF would be negative.

          13. fredwilson

            not necessarily because the cost of that stock is being valued at current prices, not the prices at issue. and you’d have a lot less dilution if you paid cash. gaap accounting on options is a double dip (and wrong in my mind), you take both a P&L hit and a dilution hit. you pay for it twice.

          14. PhilipSugar

            Yes the other area is Goodwill on acquisitions. If my stock is valued at huge multiples of book value, sales, EBITDA, and I can buy you for a small fraction of my multiples and still keep my stock value high I have to pile on a ton of goodwill to write down.

    3. kidmercury


      1. fredwilson

        See my reply

    4. fredwilson

      YeahAnd that’s why they had to be sold even though they had huge potential

      1. anon

        That raises the question, did they live up to their potential? and if not are you (and I mean the industry, not just you specifically) responsible that they didn’t make it, or is the final owner solely responsible?Seems counter intuitive for a ‘venture’ firm to sell something that has huge potential, no? Venture funding is in the potential business.

        1. fredwilson

          someone has to cover the burn. tumblr’s annual burn was almost 50% of the size of our entire fund!!!

          1. anon

            I completely empathize. But continuing with this blog post’s point about perpetual burn v. generating profit, it makes sense to point out that perpetual burn companies can also be successful exists as long as you find someone large (risk tolerant) enough to cover their burn. And because those data points exist, it’s easy to see why other companies follow in their footsteps. I agree/and applaud your point about start ups having to eventually generate profit, but it’s a bit of a mixed message when there’s a lot of very successful exits that haven’t. Once the discipline is gone, it’s hard to get it back.

          2. Daksh

            “but it’s a bit of a mixed message when there’s a lot of very successful exits that haven’t. Once the discipline is gone, it’s hard to get it back.”Compelling thought. I wonder what VCs which aim to promote Entrepreneurs and not Fund Investors have to say about this.

          3. seeingfurther

            Gulp. I will never play poker with you.

          4. Mike Bestvina

            So what’s in it for Yahoo?

          5. JamesHRH


          6. JamesHRH

            Who led the round that funded that burn rate (thinking it was not USV)?

          7. fredwilson

            Insight and Greylock

          8. William Mougayar

            that’s quite a revelation.

          9. Twain Twain

            When I worked in Strategic Investments at UBS, there was only one metric I focused on: cash burn.Now, as a founder, I read about startups raising $ tens and hundreds of millions when they don’t have what Tim Cook would call “primary technology” and what Peter Thiel would call “unique technology that enables them to build a monopoly in that market”.Sure, those startups burn cash to acquire users and to make their offices all trendy etc.It would, though, be a lot more beneficial for tech sector as a whole if they were burning cash to build primary technology.That’s where my cash as a founder goes: building primary technology.

          10. karen_e

            Comment of the day.

          11. karen_e

            You seem relieved to let this fact out into the ether! Nary a whisper when they were still in your portfolio. 🙂

      2. arustgi

        This admission is very profound. Kudos to you to have the humility to state that in a public forum.

        1. LE

          “Kudos to you to have the humility to state that in a public forum.”Fred uses that general transparency to his marketing advantage. It’s one of his unique selling points.

  33. MFishbein

    “At some point you have to build a real business, generate real profits, sustain the company without the largess of investor’s capital, and start producing value the old fashioned way”Amen. Concerns me too how many companies are not doing this.

  34. Richard

    Defining risk and collecting data to measure it can go a long way to understanding survival.

  35. Matthew Case

    “At some point you have to build a real business, generate real profits, sustain the company without the largess of investor’s capital, and start producing value the old fashioned way”Humorously I recently interviewed at a startup here in the midwest and when I asked about their revenue horizon the president looked at me like I was crazy and said “that’s not how you build a high growth business”. Thankfully I didn’t get the job.

    1. pointsnfigures

      it’s how you build a sustainable business…..

  36. Rich Kilmer

    I think its also an issue of investing in a product idea vs a business model focused around monetizing that product idea targeting a clear market with need. In my experience the burn really gets bad when the model is unclear but you’re still building product. We had our product idea and market but we waited until we had a business model that we felt comfortable doing a projection with before taking any capital (even seed capital). We gut-checked the model with initial customers and industry partners. We’d developed multiple iterations of our product on our own nickel but until we got the model aimed in the right directly, we just didn’t feel right about taking investor money. Then we started raising angel money to validate the model and build up the initial paying customers. All along we’ve iterated the product (it targets pharmaceutical logistics) and added significant features BUT the model is still the same…we have not adjusted it much at all. We had a bit higher cash flow requirement on start than many angels felt was ‘normal’ but the six members of our team all needed a certain level of payroll (not excessive, but necessary…I worked with every one of them on it). We needed a team that included product AND sales on start to validate the model. We are now using the rest of the seed money to build up enough of a sustained “proof” of the model (recurring revenue) to have good foundation for a fair valuation for the A round. The A round use will be focused on growth…leveraging partnerships and expanding the team in a balanced way to achieve significant customer growth while achieving REAL profitability as soon as is practical.

  37. Danielle Morrill

    As a founder there is an obligation to put that money to work to increase the enterprise value of the company. Anyone who has raised in the past 2-3 years knows who is willing to overpay to get in on a hot deal, or get a good logo on their website, and this behavior is falls heavily in the hands of investors because they are doing it over and over again — this isn’t a one-off fluke it is a pattern (there are 174 deals > $60M in the past year).A founder would be crazy not to take the money on good terms and do her best to build whatever she can, and if $60M is raised it isn’t crazy to burn $4M/month.I made a list of the firms who are invested in the most companies who have raised $100M or more in their lifetime and are not yet exited. It matches up with my perception of who is the most “burn insensitive” pretty well, and I’d be curious to hear your thoughts. http://mattermark.com/which

    1. fredwilson

      I disagree completely and have written why many times here at AVC. It is exactly this kind of thinking that Gurley is railing against and he’s right to be doing so.

      1. Danielle Morrill

        You may disagree in spirit, but it is confusing to me how you can have Twitter, Zynga, SoundCloud, Foursquare etc. in your portfolio and not think founders look at those well known companies and how they are funded, how they hire, how they spent… and think that is what should be emulated.

        1. fredwilson

          Twitter got its act together, built a strong revenue operation, and is now printing cash.it’s time for entrepreneurs to emulate that

          1. Danielle Morrill

            I don’t disagree that is something to emulate, but there is no way investors are going to get away with crafting a story to makes it look like they’d be singing that tune all along.VC investors are knowingly enabling this kind of spending, and it can hardly be coincidental that this new “RIP Good Times 2.0” message emerges on the eve of fears that the Fed raising interest rates (or whatever they’ll announce tomorrow).In 2009 when Twitter raised their $100M round that wasn’t the case. It’s not just USV enabling this, it’s every large fund — Benchmark is saying one thing and doing another as well even in the past few months. $65M Series A in unlaunched company Vessel, $60M Series A for Xapo, $162M has already gone into Snapchat.

          2. fredwilson

            we are not enabling it. we are fighting it. and losing. we never ever push money on entrepreneurs. we almost always offer less money at a lower price than what others offer. it’s a source of great pride. we put our money where our mouth is.

          3. LE

            Your job is to make money. Who really gives a shit what bloggers or commenters think anyway. What’s ironic is that exhibit c to me of “part of the problem” is Danielle’s company. Which I don’t begrudge her for at all. (See “your job is to make money”..)

          4. JamesHRH

            That’s pretty limited.Mark Suster posted recently that he was looking for greater professional fulfilment in his investing My first reaction was similar to yours, but, when you think about it, his LPs are backing him.Where he is at is where he is at. LPs can back him or not.Maselow’s Hierarchy Baby!

          5. LE

            Mark Suster posted recently that he was looking for greater professional fulfilment in his investingMy first thought when I hear something like that is that a person feels that luck plays a big role in whatever money they make and they feel somewhat guilty about what they have done or made. Because they know there are 1000 guys like them that are smarter, worked as hard and all of that, that didn’t have the luck. Of course luck plays a role in many things (I’ve had luck as anyone has had) but nobody would argue that a person who gets to be Surgeon General or is building the World Trade Center had as much luck as say, Mark Zuckerberg. I mean take the timing out of when Zuck did what he did and everything changes. Take Bill Gate’s mother out of his past and we don’t have a billionaire do we?I’m lucky (hah) I have to work hard for whatever I have or whatever I’ve done so I already get “greater professional fullfilment” through that.Otoh if things were easier (and luck played a bigger role = $$) I might feel the same way as Suster does.

          6. JamesHRH

            I equated it to confidence.He now knows he can be a successful VC (& make $), so he is adding ‘things I want to invest in’ to his criteria.Fred likely in similar position.

          7. Daksh

            Your last statement highlights, rather than downplays, the core idea – some people provide capital beyond “job to make money”. Their motivations/factors (luck etc.) are secondary.

          8. Mike Bestvina

            The sentiment here smells very similar to housing crash in 2008. People would be crazy not to take an ARM deal on their house and lenders didn’t think the system would ever crumble. Pointing the finger does very little to solve the problem (if a problem even exists).

          9. kidmercury

            it would be great to see a real rundown of the numbers supporting the thesis that twitter is printing cash. the widely reported financials clearly show otherwise. even if you just look at cash or current assets and forget FCF or earnings.

        2. LE

          Please correct me if I am wrong but doesn’t your company (mattermark.com) offer a product that basically tries to reduce business investing down to quantifying numbers as a way of determining what businesses to invest in vs. looking at qualitative factors?Data is the core of Mattermark and we take it very seriously

          1. Danielle Morrill

            I am in the business of helping people make decisions. The data we provide is one input in a very detailed and sophisticated process, whether it is investing, M&A, biz dev, or sales. Qualitative is still very important, and humans are great at that. Computers are great at the quantitative part… and that’s where we can add value and save time.

        3. JamesHRH

          I think it would be fair to say that Fred gets you to mezzanine funding. So, his hands are pretty clean on this issue.USV did not lead whacked out rounds on anything that I can think of (last major funding on TWIT led by John Doerr @ KP).

    2. kenberger

      Danielle- your service, and your comments here, are deeply informed and actionable. Hope to see more of them here on AVC.

      1. maxniederhofer

        Seconded 🙂

      2. JamesHRH

        Yes, but I am on her mailing list & have no idea how MM will ever be profitable.

        1. kenberger

          none of my business. I find it a very unique and valuable service.i didn’t see Fred’s vehement dissent to the original comment before making my comment, and now a spritely discussion has ensued, but i still say this is welcome content both on MM and here.

          1. fredwilson

            the more spirited the better. she is doing everyone a service by lighting this up

    3. Adrian Sanders

      how much money you raise =! how much you need to burn to execute on your vision.especially when if the market is frothy and you’re going for a cash grab.the reality is that very very very very very few companies have actual product / market fit. they THINK they do, and they get social proof and support from VCs and the community, but the fit isn’t exactly there.this only gets exacerbated in frothy markets with strong soft-landings (ie flipping the company up and out).basically right now the industry is banking on a few HUGE exist to pull everyone else’s weight, and if not, then it all collapses like a ponzi scheme.

    4. ShanaC

      That depends on where that $4 Million/month is going.Basically VC is a highly unhedged industry. So are these companies. many of which are spending on something that we can’t really judge the value of (because, hey I can’t see your internal books)But if you are raising $60 MM series A, unless the product development costs are actually that high (and there are things in this world where product development costs are that high, including in software*, but probably not a lot of these oversubscribed deals), then let’s assume what we’re paying for is marketing costs/growth costs. Lets call about half of the burn marketing, with the other half salaries and operationsAt $2 million/month I’m having a bit of a WTF moment. Mostly, because at much lower numbers, I’d hire a consulting data scientists/econometrics person to start doing advanced models about where spend/kinds of spend should go, and how that links up to purchase behavior/app behavior/site behavior/what have you. And while that is conceptually expensive as first, this is still really cheap (i’ve build mini versions of this and I am not an engineer, and I am partially sure I could build a crappy version of at least parts of the data collection side: again, not an engineer)I can see initially spending some consulting money on brand voice, etc, down pat but eventually I would have places to run out of spending it. There isn’t enough audience for not enough products, and at that early of a stage getting a very full picture actually matters – spending lots of money willy nilly will just screw you up later.So what could they be spending money on?*If you need to build a stock exchange with perfect fault tolerance in 3 months, it costs about 4-5 million. That’s an example. Or something with satellite level perfect tolerances because you are going to mars. or something involving better genomic research. Really cutting edge stuff.

  38. arustgi

    Fred, couple of questions.1. You mentioned that some of your portfolio companies have burn rates that you are uncomfortable with. As a board member at these companies, is that something you can influence?2. What best explains the actual / projected burn rate at a given company?a. The business strategy.b. The spending attitude of the entrepreneur.c. Something else.Lastly, if as an investor when you look at an investment opportunity and see a project cash burn rate that you feel is unjustified / unreasonable / untimely, how do you respond to that?

    1. fredwilson

      You can influence as a board member but if the board has a bunch of VCs on it who piled the money in at stupid prices in the first place you may not have much influence

  39. Steve Goldenberg

    This problem is magnified consistently by the press focus on funding events rather than profitability. All the time we see “SomeCo raises $X million from Top Tier firm with Ashton Kutcher, Billy Joy and Another Famous Angel participating” as news. But when was the last time you saw “SomeCo announces it has reached breakeven and will be profitable going forward?” The focus is on the wrong thing…

    1. fredwilson


      1. Sharky

        IMHO there’s a very simple reason you don’t see the press report companies reaching breakeven/profitability very often: the companies themselves don’t announce it to anyone (except, upon occasion, investors). It’s like waving a red flag to other competitors and even non-competitors that there is something interesting going on here that’s worth exploring. If you reach profitability your next job is to grow as quickly as possible and achieve a dominant position in your niche. Announcing your success doesn’t do much to further that goal, and might in fact make it harder to reach. “Your margin is my opportunity” – Jeff Bezos.

        1. karen_e


        2. Tom

          Yes, or it could be that virtually nobody is making profit.

          1. rodericj

            That is a pretty broad statement. I would say that the glam startups may not be making profits, but that is because those are the ones that are featured on “news” sites. There is a very long list of new companies that make a LOT of money.

          2. Tom

            There is of course a very long list of companies making money, but the list of companies running at a loss is far far far longer and with much larger negative numbers. When even the most celebrated apps du jour turn a loss, or convert attention into money at a lower rate than any time in history, you have to take note. http://techcrunch.com/2014/

        3. Tony Hue

          “Your margin is my opportunity” – Jeff Bezos.Love that quote.

      2. Name

        You – investors – can fix this. Tell your companies never to issue press releases around funding. The blogs that constantly hype funding rounds – e.g. Techcrunch – do so because they get handed this “news” on a plate. At the same time, PR agencies brief entrepreneurs to never talk about profitability or costs.

        1. Adam Gering

          Most of the tech blogs troll SEC filings; can’t hide those.Besides, if you just raised money you want to recruit. It’s a good time for PR on tech blogs.

    2. jusben1369

      Blaming the media is always too convenient. It reflects human nature. If they got clicks for “SomeCo announces it reached breakeven” they’d do it. So what you’re really saying is “culturally we should focus less on shiny new things and care more about things reaching middle age and be more balanced” But yet here we are on a blog that’s focused on shiny new things because we too find that interesting and exciting.

      1. Steve Goldenberg

        Fair enough, but my comment isn’t meant as an indictment of the media but an indictment of what is a true measure of success. Shiny new things are America’s specialty; they create new markets, open up exciting new types of human experience and drive growth in our economy. However, the biggest, baddest news really should be when those new things become sustainable.

        1. Darius

          agree, this is actually more a responsibility of investors en masse to let things get out of hand, which is great to see Bill and Fred and a few others raise the concern – because everyone listens to them, including the press.On the Co. side if the new currency is users and not necessarily revenues and you can actually sell a co with zero rev and 100M users for $10B it would be difficult to not spend as much as possible to acquire new users. This applies to only consumer products but it’s becoming a significant driver.

        2. Pierce Nichols

          I think the underlying problem is that closing a funding round is a big, obvious, and discrete event. Reaching sustainability isn’t a single event; it’s a series of small events that are individually pretty boring to someone not directly involved. Any minimally competent writer can produce a compelling story about the former. Creating a compelling story about the latter takes a great deal more skill and talent… and therefore is necessarily much rarer.

          1. sigmaalgebra

            As a reader, each time I hear about the goal of “compelling” I want to find a mainstream media writer, a long, heavy rope, and a tall lamp post and otherwise get on a rooftop and scream loudly enough to blow down trees and buildings for a radius of 20 miles, more than a nuke. Or, in case not clear, I deeply, profoundly, bitterly hate and despise the goal of “compelling”. I’m not being nearly clear enough: There are no words to be clear enough, and the other ways are all deeply illegal. Did I mention I hate the goal of “compelling”? What kind of brain-dead, dangerous, irrational, dysfunctional, grab them by the heart, the gut, and below the belt, always below the shoulders, never between the ears, chunky industrial waste upchuck is that?Instead, I want, how do I put this clearly, information, as rock solidly correct, thoroughly documented and referenced, and as useful and valuable as possible I can get. “Compelling”? I have an irresistible, sudden need for a 10 gallon airline bag. For more, add in any scatological analogies can think of. I’m not pissed off. I’ve been pissed off. Now I’m way beyond pissed off. And have been for years.Solution? Sure, in one word, the Internet. There we can have, for each clump of folks, or, more accurately, each clump of similar interests, the media provide the content they like. Now “the medium is the message” is driven by the “medium” which is the Internet with, say, 100+ million blogs, similarly for video clips, long tail Web sites, etc. This one size, “compelling”, fits all will go the way of the buggy whips. RIP “compelling”. Welcome to what people want, including for some people, rock solid information they can use.

          2. Tim Edwards

            I think if I as a founder I gave you as the press the skinny(back story) and showed the bleeding knuckles from the fight to give my baby (idea) life. And we focused on that forecasted model for the basis of the story. The day my company goes from red to black with a +42 mil ought to make for a pretty good climax and a excellent story.

      2. bernardlunn

        Yep, did a few of those bootstrapper stories when I was at ReadWrite, loved writing them and interviewing the entrepreneurs but page views were lousy compared to funding rounds with famous investors

    3. LE

      This problem is magnified consistently by the press focus on funding events rather than profitability.The press is a reflection of what their customers find interesting which is how they sell ads and how they make money. Everybody is looking “to get paid”. They are no different.The saying in nightly news is “if it bleeds it’s the lead”.Amazon sells what it’s customers want, so do the food companies and so do restaurants. Not in business for the greater good of society and all of that.

      1. Derek Kerton

        “if it bleeds it’s the lead”.If only there were a way of making that slogan a touch more catchy, then I’m pretty sure it would have legs. Maybe a slightly better rhyme or rhythm…oh well, I guess it can’t be done.

        1. sigmaalgebra

          As I recall it, “If it bleeds it leads.”.

      2. Cima

        This made me think of that great running gag in “Silicon Valley”. All of those start-up companies at TechCrunch Disrupt wanting to “make the world a better place.”

    4. Adrian Sanders

      Not that I disagree. But pageviews are the name of the game. And what people want are celebrity stories with recognizable names and strong “rags to riches” story arcs.For the pageview model of journalism, the focus is 100% on the right thing.

    5. ShanaC

      because one of the things I’m seeing is raising $x million is part of the sales cycle – no raise, no sales

    6. ErikSchwartz

      Companies announce funding it because the press will cover funding which leads to free PR without having actually accomplishing anything meaningful.

      1. LE

        Getting PR is accomplishing something meaningful though. It’s marketing and burnishes your image.Back in the late 90’s I got various press. And years later people in the business thought I was a somebody because of that press. Relative to the effort to get the press it paid off for sure. So to me (money in my pocket from deals) that is definitely accomplishing something.

    7. mike

      typically large funding = validation by smart people = high growth and potentially cash flow

      1. JamesHRH

        there was a 30 month period from 1998-2000 that was atypical.Fred is saying that he agrees with Bill Gurley that this period of time is really starting to feel atypical.

      2. Liban mahamed

        I strongly disagree, large funding could be based on pure hype many times.One glaring example; Ubber and 17 billion valuation.The entire US taxi fleet in the USA has a revenue of 15 billion dollar. That is revenue before expenses or fixed costs.

        1. arush_trydotcom

          Your analysis of Uber’s valuation is naive.1) Uber is in 200+ cities globally – today! The global market is over $100B today!2) Uber is growing the market. People are taking more ubers than they were ever taking taxis, for a number of reasons.3) Car ownership is falling4) Uber and Lyft’s most recent rounds were betting heavily on the future of self-driving transportation, easily a trillion dollar industry globally5) Uber will transform the last-mile logistics industryPlus, Bill Gurley was definitely not talking about Uber in the WSJ article. He does an even better job of explaining why you are wrong about Uber here: http://abovethecrowd.com/20…Uber will be one of the most important companies of our generation – if not ever.

    8. JamesHRH

      I agree that the focus is on the wrong thing.The focus is on the VCs and entrepreneurs when it should be on the transactional extractors ( thanks to Chris Dixon here ) who are causing the problem….Wall Street.Wall Street blew up the DotCom bubble via:- ignorance ( no idea or concern about NewCo – IPO name – viability )- greed ( IPO = fees )- deceit ( Buy Rating linked to Banking fees? F*&k NO! – Chinese Walls I tell you )Wall Street blew up the housing bubble via:- ignorance ( no idea or concern what NEW product – CDO – contained)- greed ( CDO sale = fees )- deceit ( Shorting CDO I just sold you? F*&k NO!! – Long like you I tell you)Wall Street blew up the High Frequency Trading bubble via:- ignorance ( HFT posts 100’s of consecutive + trading days – unheard of )- greed ( SW programs / blind pools = profits )- deceit ( FRONT-RUNNING? F*&K NO!!!!!!! – providing liquidity I tell you)> insulted even, I dare say.Now, I bet, they are blowing up a Mezzanine VC bubble, via:- ignorance ( SW eating world = every AppCo w traction has Uber economics )- greed ( higher valuations = ???? has to be an angle here…… )- deceit ( over capitalized? F*&K NO!!!!!!! – VC says Leader w Traction I tell you )Wall Street is the dealer and the drug is cash. They are, like most organized crime outfits, smart enough to always find some sucker / lackey to stand in front of the flash bulbs and bask in the adulation ( entrepreneurs here, on the way up ) and then pin it on some other fall guy ( VCs here, is my bet, on the way down ).Someone needs to disrupt their supply.

      1. Nilanshuk Haldar

        Blaming Wall Street is too simplistic. They are to blame, but so are others, for each of the bubbles you have mentioned.In the context of the original article here, we should remind ourselves that:1. VCs are working for their LPs who – like any institutional investor – demand and reward performance. So VCs are encouraged to chase performance and make a killing while the music lasts. In this respect, they are much more Wall Street than the entrepreneur/innovation-friendly posturing that they put up2. With so much media noise (again, they are just doing their job to get the advertising dollars flowing) around the Whatsapps and Snapchats of the world, everyone and his uncle wants to jump on to the entrepreneurial gravy train.1 reminds me of the housing bubble lenders, and 2 reminds me of the over-leveraged “greedy” consumers of the same bubble.In short, both upstream and downstream actors have a role to play in every bubble. Assuming that only a few of them are stupid or greedy is ignoring human mature

        1. JamesHRH

          Well, substitute Institutional Finance Vipers for Wall Street then.The top tier of VC definitely fall into that label, but not universally, as some of them started out in collegial, traditional VC operations.It used to be that VCs who were worth their salt guided you through the mezzanine / IPO Vipers Nest, based on relationships and experience.Big is not better, in finance, at a certain point, it seems.Fred & Bill run traditional early stage shops. They get to call out the bubble at the mezzanine level.

  40. James Ferguson @kWIQly

    If Bootstrapping seriously using personal equity until startup becomes revenue positive.then add 1 starIf you have a big market, team and traction you don’t “need funding”then add 2 starsIf PMF becomes evident before series A funding which is for growth in a land grab with network effectsadd 5 more starsIf stars > 5 – Down round not possible – Burn rate Irrelevant !

  41. sbmiller5

    If you search for “Venture Capitalist Sounds alarm on startup investing” WSJ will give you the full article for free, if you arrive from a search engine.

  42. Pranay Srinivasan

    Ha, love this, Fred. I’ve been told I was too “conservative” because I felt I want to be Cashflow positive with under $1MM in revenue, and even with ’00s of ‘000s of investment to Seed / Series A, I’d still like revenue and gross margins to be positive.Most VCs told me I’m not aggressive enough and that i need to grow my customer base as opposed to my fulfilment operations infrastructure.Ofcourse its a case-by-case basis, but we try and keep our burn under the amount of money we earn as margin on sales. Its a simple business philosophy over 14 years of business has taught me.It makes me less dependent, helps me chart a strong course, and of course the investment dollars I raise help me scale infrastructure to manage demand.Glad to see we’re not that far from the truth most good investors believe in!

    1. JamesHRH

      Your numbers do not equal VC investment, not that your approach is wrong.

      1. Pranay Srinivasan

        Hey James,My point wasn’t whether we’re VC-ready or not, it was that we are cognizant and completely keyed into our sales v/s profitability metrics far more than most companies are at this stage.And we feel its a key component of our company culture that we’d like to preserve.And to your point, we’ve seen a lot of credit given to us by a lot of VCs for being cashflow conscious, growing month over month in sales, scaling responsibly without taking on large liabilities until we can reach a tipping point that requires large infusions of cash to double down on *what works*.At that point, you’re multiplying a scaling, successful business model – which needs to be built on an inherently profitable business logic which cant be “learnt” later in the game.

        1. JamesHRH

          Pranay,Your micro statements are really impressive (you are clearly doing a great job), but your macro statements are no where near accurate.The number of Unicorns that come from startups that are CF+ immediately is miniscule. The number of founders who take some seed money and eyeball the CF to success is massive ( think about all the businesses that are old school, non-SW…..my favourite is auto body shops ).Keep at it.And remember, just cause the card says VC, it does not mean the person you are talking to is someone you should listen to…..just like there are tons of MDs whom you should never listen to about your health.

          1. Pranay Srinivasan

            I’ll remember that. I’ll also remember that precedent is nothing.

          2. JamesHRH

            Right on brother.Just don’t come here telling everybody that your way is better. Its better for you and that’s about it.

          3. Pranay Srinivasan


  43. jusben1369

    Given the title of this article Fred I felt it only appropriate to add a verse:”Satisfaction (uhu hu hu) came in the chain reaction(burnin’) I couldn’t get enough, (till I had to self-destroy) so I had toself destruct, (uhu hu hu)The heat was on (burnin’), rising to the top, huh!Everybody’s goin’ strong (uhu hu hu)And that is when my spark got hotI heard somebody say

  44. Salt Shaker

    “At some point you have to build a real business, generate real profits, sustain the company without the largess of investor’s capital, and start producing value the old fashioned way.”Curious how your risk/tolerance levels have shifted dramatically w/ time and experience?

    1. fredwilson

      i have gotten way more tolerant of risk and way more sensitive to it at the same time

      1. Salt Shaker

        In other words, you’ve become much wiser 🙂

  45. Bush

    Talk about the dealer blaming the addict.VCs want moonshots with massive growth. There’s no interest in moderate, revenue driven growth. Outlandish growth projections (with spending plans to support them) are rewarded by venture capital markets.Big losses in pursuit of big gains are fine – until those losses are no longer convenient for the VC.At which point the CEO should buckle down and focus on moderate revenue driven growth.

    1. JamesHRH

      That’s just incorrect.Hottest VC shop right now – a16z – is founded on the principle that there are only 15 companies of note formed in each calendar year, in tech.Fred & Bill are raising the alarm that the restrictions on going public (SarbOx, etc.) has forced massive amounts of investment into the mezzanine space – more than it has historically required or consumed (just like the Dot Com bubble had historically little – hell none, at the end – mezzanine financing).The ‘moon shot’ funding / growth process and its norms aren’t some sort of happy accident. They have been developed of the last 60 years of experience. People with Bill & Fred’s experience are perfect barometers of the funding climate.

  46. ErikSchwartz

    The major way burn rates can drop is for salaries to drop.When salaries drop the discretionary spending by tech employees will drop. This demographic is hugely important to a variety of other startup/tech companies (Uber, food delivery, subscription beef jerky, etc).That’s how this crash will look.

    1. johnmccarthy

      Dear god, not the subscription beef jerky, oh the humanity 🙂

    2. PhilipSugar

      I think are looking at the effect not the cause. The cause will be companies cutting back on hiring. That will actually be an effect of companies not being able to get exits, which will cause valuations to drop, which will cause companies to cut back on hiring. The effect will be salaries will drop.I tell people this all of the time a 20% change in demand is HUGE. When there are 11 people looking for 10 apartments or 9 people looking at 10 open jobs, somebody loses out. Nobody likes losing prices go up quickly. When there are 9 people looking at 10 apartments or 11 people looking for 10 jobs the worm turns.

  47. Rob K

    One thing that I think is under served in the conversation about profit is the culture of profit vs. the culture of losses. There is a significant cultural inertia about losses. This becomes a cultural norm that is hard to break out of. I see it in SaaS businesses which should be of a scale to be profitable but continue to lose money because they can. Because they can raise more private capital and have not yet had the discipline to get profitable. Subscription businesses like SaaS are interesting because they lose money in order to grow quickly through investing in marketing/sales ahead of the revenue. But those businesses get such a culture of losses that you see the G&A increase dramatically as well as a % of revenue. I have invested in and led SaaS businesses that are profitable so I know it can be done. But those businesses had a focus on the bottom line too.

  48. Akshay Mishra

    (I’ve never raised money before, so “that’s not how it’s done” will be a perfectly valid reply for me)I’ve wondered if the problem lies in two areas:(a) The type of funding vehicle used (equity/options vs debt/convertibles)(b) The types of questions asked by VCs and the expected precision in the answers to those questionsElaborating,(a) If burn rates are an issue where there needs to be an alignment between the CEO’s and the investor’s incentives, then why isn’t debt/convertibles a more popular mode of funding? Does it distort other incentives? In more “traditional” companies (ie non web/mobile), it’d be no shame to raise money largely through debt and then the founders working hard to repay it. Is the stick of debt too inappropriate a tool for guiding incentives than the carrot of equity?(b) If the money being raised is a form of equity, then my biggest concern is that it will lead to the wrong variety of questions being asked – those that will focus on potential valuation and exit profits rather than burn-rates or probability of failure. In a booming market, burn-rates wouldn’t matter as much if the startup is viable as a hot-potato with increasingly higher valuations and exit options. Is the question “if I lend you money/invest in equity, how are you going to spend that money” asked with enough conviction, then or just as a formality?

  49. Gregory Magarshak

    Being the guy who’s built most of the platform in our startup, we always have the option of bringing the burn rate really low. And having a remote team that works asynchronously (Buffer just posted a great post about hiring remote) definitely helps keep costs low, as does open sourcing the underlying platform itself.I would argue that open source projects have the lowest burn rates pound for pound.But having said that, we’ve found it’s a trade-off. If we had ever had a runway of 12 months at $20k a month we’d be done by now and the platform would be more robust – with test suites, a community, etc. Instead, we’ve been growing organically and our revenues have been increasing on our own steam. If you look at it mathematically though, in a sense we traded speed for control of the company and independence. We’re now in a much better position (quarter-million active users and growing, open source platform battle tested on many client projects etc.) to take on investment if we choose to. The risk we took was that someone may beat us to market with the flashy idea … but when you’re building a platform, that’s not actually a worry. Because platforms take years (drupal, wordpress, joomla, magento, bitcoin, they all did).

  50. LE

    All the money sloshing around in the startup world is leading to secondary problems. Landlords in San Francisco are trying to lock in startups to 10-year leases. Gurley thinks this is a sign that landlords believe their rents are at a record high, and they want to lock in the rate. If landlords thought the price was going to be higher, they wouldn’t be asking for 10-year leases.Gurley’s point as an anecdote is fine – he is simply taking evidence of missiles in cuba by indirect evidence (big ships on the way to the harbour) as opposed to actually seeing the missiles in cuba by hi res photography.So while I buy into his point and the anecdote definitely reinforces the point, I don’t agree that “If landlords thought the price was going to be higher, they wouldn’t be asking for 10-year leases.” Meaning he is right money is sloshing around but that’s separate from agreeing that landlords “think prices might go higher”. This sounds similar to Kennedy’s “shoe shine boy buying stocks time to sell the market” to me btw.I mean obviously anyone in business knows they can’t time the market and predict the future. Right now the market is at 17k. I told my mother to sell. I am merely telling her to lock in money that she has made. Doesn’t mean I don’t think market will go higher. I mean how would I know that? How do realtors know that the lease prices won’t go higher? They don’t. They don’t have a clue probably about the startup world other than what they read. And “this thing” has been going on for longer than 2 months so why now?Anyway by the contrast principle compared to past rents (and bubble history) they are willing to simply “fold their hand” today and not go for door number two. This is not the same as “not thinking prices will go any higher”.As far as why prices are so high it’s obviously a) supply and demand b) lack of negotiating skills of the average group member c) lack of input from anyone supporting the companies doing leases to help them out with this. It’s a feeding frenzy. And feeding frenzies definitely get you more money. I invent feeding frenzies when I sell things. It works very well. Practically never fails actually. Works on fud (fear uncertainty doubt).I mean if I was a realtor and trying to lease a property I would actually hire people to show up and appear to be interested in the same place if that was a way to close a deal and get a 10 years lease (with bumps of course!)

    1. PhilipSugar

      What he is pointing out is simple: When VC money is going to enrich others at rates ridiculous to what non VC companies are willing to pay you know you are in a bubble. Its not just real estate but that is easy to see.

      1. LE

        When VC money is going to enrich others at rates ridiculousI don’t know but it sounds a bit “last man over the bridge” to me.I mean who is to believe that Bill Gurley, a VC who plays the game has any particular game to play but his own? So what you end up hearing is that his version of “fair” is right but others is not right. I fully own my greediness if you want to call it that. I’m out to make a buck any way I can. Of course if I blogged I might, out of necessity, change my tune.Anyway to illustrate if you go to synagogue or church 10 times per year that’s the right time anyone more makes someone (in eyes of the 10 timer) “real religious”. If I run 50 minutes per day 7 days that’s the “right amount of time”. Any more “you are an exercise fanatic”. Any less “you are lazy”.As far as “enrich others” you have to also know that owning real estate can be feast or famine. I own some rental commercial real estate (office condos) and I had a great credit tenant at $x per sf rent. For the particular properties that I own the asking rent has dropped to .8*$x. Not only that but I passed on an offer of .7$x where I would have no vacancy (on 1 unit) and of course now I wish I had taken that. Because at .8 there are many properties and as they say in real estate “I will have to take a haircut on any deal probably”. And tenants know there is more supply then demand and they work that angle. They aren’t caring about my interests at all. It’s business.So the property owners (and realtors) are just making hay while the sun shines. They know they will go through lean periods when this bubble bursts. So why should they not get “enriched”? That’s part of the risk and reward of business.(Note I am reacting to the use of the word enrich as a pejorative …)The bubble is not the fault of any one VC but rather VC’s or the various actors as a group. Which is always the case. Rather than use “you can only be as honest as your competition” I will offer “it’s hard to be a saint when you’re just a boy out on the street”.Basically a group of people determines behavior and nobody is bending over and greasing up (bogu) to save the group. They act in their own self interest. I’m sure in MBA school they talk about this in book chapters and lectures.I’m sure Gurley, Fred et al are still doing deals and will continue to do so. Because they have to. They just aren’t happy about it. But as members of the group they have no choice in the matter.But Warren is still getting bargains, eh?I think the difference is Warren probably greases some palms for deal flow.I get deal flow (in some areas) by doing that as well. Nothing heals like cold steel.

        1. PhilipSugar

          I am not arguing what is fair you should know me better than that by now. If you can get 5x normal rent, get it for a 10 year period and require half up front, you should see if you can get 6x for 15 years with 7.5 years up front. I don’t care, you are stupid if you don’t.Should a good developer not use a headhunter and make as much as she can? No.Should my buddy who loves experimenting with new services turn down Uber’s $500 offer to move him from Lyft to Uber even though he has no intention of moving? No.The only point is that whenever this happens since the times of selling pickaxes to miners you know a bust is coming.

      2. LE

        By the way this shit is Exhibit A for a bubble:http://startupclass.samaltmhttp://techcrunch.com/2014/…Or really the root of all evil. I hate all of this “everyone should start a startup” as well as the fact that they have a particular view that they have brainwashed everyone about as far as what a startup is or what a young person out of college should be doing. Trying to hit the lottery basically.Had a concrete contractor stop by this am for a quote. So he asks “what do you do”. When I tell him the first thing he wants is “someone who can design my website”. Wish I knew someone but it’s like finding a good plumber. But it’s clear that he has no clue what should even be on the website at all. But while he doesn’t want to spend much he could easily be sold on spending money. For that matter he would spend money on anything to get more business. (Told me he is doing great with placemat advertising…)Fundamental business skills have been lost by this generation unfortunately they don’t even know there is a world out there of things going on that don’t require losing money for years and gambling.That said I benefit from all of this and I’m glad it’s happening of course.

        1. Amar

          hah! love that quote “his shit is Exhibit A for a bubble”. The starry eyed look at Y-Combinator and picture the guggenheim while in reality it looks like YC is building the HSN (home shopping network) for peddling startup plumbing.

          1. LE

            I think the “retired” PG doesn’t know the difference between a true institution (Harvard, Penn, Stanford, US Senate etc.) and an institution in the eyes of the “newly hatched”. A true institution can’t be easily knocked off their throne or have their power taken away. Nobody is going to be the next Harvard amongst the younger generation Harvard is Harvard for generations and has a good chance of staying Harvard. It’s not run by kids. Otoh, a YC is the flavor of the moment. Because it’s the thing that is touted by bloggers etc with superlatives and slathered with attention. All that can go away pretty quickly. [1] A reason PG shouldn’t have been so quick to go on Sabbatical and put his “institution” in the hands of a guy like Sam Altman. He should be in the wheelhouse continuing to steer the ship.[1] For example Fred’s name failed to have “prominent” attached to it in the story iirc. And who cares about John Doerr anymore they are practically calling the guy a has-been.

  51. ShanaC

    In other things: One of best way out of this mess would be having a way to hedge marketing risks/costs

  52. BillMcNeely

    Wow a VC that subscribes to David Heinemier Hansson view point of serving the Fortune 5, 000, 000, keeping an eye on costs , making a profit and being competitive AWESOME!

  53. jason wright


  54. PhilipSugar

    Whenever you see the people selling the pick-axes to miners getting way more than they ever did before you know a bust is coming. Its been that way since at least the 1800’s and I’m sure somebody can point me older examples.

    1. LE

      Whenever you see the people selling the pick-axes to minersI wonder how many of those doing the selling of the pick axes are expanding their business to handle the increase in business? In other words what is their overhead and how quickly can they handle that overhead when the bottom falls out.I knew a guy that bought a bindery back around 1998. At the time they did super high quality work for pharma companies. He made tons of money. He had a union. His biggest problem in life was not being able to buy the 7 series BMW because if he did the union would then negotiate harder and it would cost him to much. So he bought the 3 series. (True story). Anyway something changed and pharma could no longer do all the marketing and promo that they had. The bread and butter of his high quality bindery niche. Next thing the bank calls his loans (he had leveraged the purchase) and poof he goes belly up – bankruptcy. Just like that. He then had to scrape together to open a mobile phone store to make a living with that.Watching business over a long period of time you get a different perspective than, say Sam Altman might have or even Paul Graham. (The company he sold by his own admission was ready to go bust when Yahoo came along and bought it).

      1. PhilipSugar

        Look at Fred’s tumblr example

  55. John Revay

    “I’ve pushed back on long term leases that I thought were outrageous”I recall reading some old AVC posts about Fred getting involved w/ landlords back around the bubble time frame trying to restructure or unwind leases….

  56. Mike Bidgoli

    I think the problem is also partially exacerbated by some investors pushing their portfolio companies to be more aggressive in the face of competition and to double down in more areas. Meanwhile the competitors are likely having similar discussions in their boardrooms. Each party’s actions cause reactions by their competitors and you have a feedback loop that makes the cost of building a company and solving a problem much higher than it should have been. It’s good to hear the kind of pushback that you talked about Fred.

  57. Rocky Agrawal

    One of the things I don’t see discussed often enough: what does pricing look like when the VC subsidy is gone? What does the market then look like? If you are selling a service at $5 when your full cost is $10, you have a VC subsidy. If your market at $5 is X you should expect that market at $10 is lower, sometimes substantially.Of course there are arguments to be made that as you scale, you should be able to drop your costs. But I expect that a lot of these companies won’t be able to drop costs to the current consumer pricing.I know my current behavior in using a lot of services would change dramatically if certain companies raised their prices toward a profitable figure. And I’m less price sensitive than many people.

    1. LE

      I know my current behavior in using a lot of services would change dramatically if certain companies raised their prices toward a profitable figure.Can’t say that in 18 years on the Internet I’ve ever seen many cases where a company raises prices to the point where it’s noticeable or matters. At least with with type of company that you are referring to. Most pricing has gone down. Was able to halve colocation costs for servers as one example. Only reason was the old place shut down. Otherwise to much pain to switch and would have paid the higher price.So in short all of this depends on the pain to switch to an alternate service. Less pain more likely.Here’s a real situation. For some things I use a company called dyn.com. When I first signed up they assured me that the service would be $x per year. Now, maybe 2 or 3 years later (I don’t remember) they are telling me essentially it’s going to cost $x per month. And the number is high two figures. Let’s call it $80.But here’s the thing. Switching is a bitch. So most likely we will pay the extra $$ for quite some time. Not a front burner issue at all.Now in the consumer market it’s quite different.In a sense if they have to raise prices the real question is is this the same as a loss leader whereby you are really doing what traditional businesses have done for some time knowing full well once you have the customer they will stay? Or are you dealing with people who can and will easily switch. All depends in other words on specifics.

      1. Rocky Agrawal

        I’m not referring to pure software companies. Those costs to go down dramatically over time. I’m talking about the new breed of companies where a vast amount of human labor is required.That’s a lot of the companies that are being funded. If your growth requires essentially corresponding growth in people, the cost structure matters.

        1. LE

          Ok makes sense. But isn’t that also a function of what the competition is doing? And if they are even around anymore? And how good the service is at that price? [1]Let’s say for example there is a company, call it “Stallone” and they promise to get a handyman to your home or business at a flat cost of $25 per hour. They are, for the sake of discussion, paying the handyman $22 per hour. No way they can survive on $3 per hour (let’s just say they can’t) but they are subsidized so they can stay floating. And build a customer base.Let’s further say that they have competitors but all of those competitors are charging the same and also have a sugar daddy.Now the deck chairs run short and all the sudden one of those companies needs to raise pricing. To, hypothetically, $30 per hour.If the handyman referral has been well received and people are happy then I say people aren’t going to be dropping like flies.Similar to how I stayed with Amazon after a) I got charged sales tax and b) I lost the ability to game them and get 5% affiliate fee.In other words they got me as a customer and now they have raised prices and I am staying.Similar to my first old school business pre-internet. We would quote a low price, get the customer, and when they were content (and we felt secure in that love) we would jack up prices. They stayed because they were happy even though a low price is what got them to be a customer in the first place (was a labor intensive business by the way).

          1. Rocky Agrawal

            In your example, what if it costs $30 an hour for the handyman and they charge $25 an hour? then a competitor comes along and charges $20 an hour. so they match that $20 an hour. Now they’re losing $10 an hour. They can keep doing that as long as VCs pile in money.But consumer demand at $20 and hour will be different than consumer demand at $40 an hour.In the handyman case, there’s another problem: if I like the handyman, why would I go through your platform once you stop subsidizing? If I like him/her, I’ll just call that person directly.

          2. LE

            In the handyman case, there’s another problem: if I like the handyman, why would I go through your platform once you stop subsidizing? If I like him/her, I’ll just call that person directly.Well for one thing if you’ve ever dealt with a contractor employed by some big company you don’t get the same contractor when dealing direct in many cases. Because without the fear of losing their referrer they don’t care as much if they don’t show up for your appointment. Or screw a job up.This might be similar to buying off ebay direct instead of through an ebay seller. The ebay selling is worried about his feedback score. Off of ebay he tells you to go pound sand.I have a case right now where I am having Lowes do a project. I could easily cut out Lowes and save money. After all it’s easy to see who their contractors are and you can deal with them direct. But I want to deal with Lowes because I don’t want to have to fight with a contractor to show up for a job. Now I don’t know how much they ad to the price or how much the contractor takes a haircut but it’s not 50% that’s for sure.To further answer your question because handymen are notorious for being overbooked so if you deal with the service you are guaranteed a certain (in theory of course) quality level and you have recourse. Handymen and all skilled trade are totally absolutely YMMV.In the case of the numbers you are presenting for $$ pay of course you could be right. But I’m not convinced that if all players are equal (and knowing they won’t all drop on the same day after all info isn’t distributed in real time as far as pricing changes) that business will be lost.Besides race to the bottom and loss leaders can happen in any business.

    2. Guest

      Solid point

    3. PhilipSugar

      This is a great comment. When you are “selling” something for $5 and it costs you $10 that is not selling, that is bleeding. The thought is build enough share and then raise the price?

  58. Carl Rahn Griffith

    It is a relief that people are beginning to finally blink at the poker table – some of the pointless and unchecked burn rates I’ve witnessed are more akin to a drunk at a Vegas table believing one more throw of the dice/twist of the card deck will pay off.

    1. Dave

      Noticing the trend and starting to blink are two different things. The market for hot companies is still ridiculously strong. Strong enough that deals are very entrepreneur friendly. So CEO’s may want a strong VC on their Board but are not obligated to follow their advice, and often don’t. Very few of the current founder CEOs at high flying private companies have been through a downturn before. It will be interesting to see how they react when the music stops and everyone has to find a seat.

  59. Joe Gleinser

    “At some point you have to build a real business, generate real profits” that’s why you get the big bucks! 😉

  60. Alex Wolf

    @jerrycolonna hammered into me that a successful product does not make a successful company. #wordstoliveby

  61. Carl Rahn Griffith

    Anyway, startups – and the Arctic Monkeys – got me where I am today! :-)http://carl-rahn-griffith.t…

  62. Liban mahamed

    Fred this is the topic of the day and the year.From recent developments one would think the concept profitability is gonw from modern capitalism. This is a test many firms both small and large will fail today.It is not limited to startups there are large 20 year old firms that produced no return for shareholder.The most bizzare thing is many Stock analysts at large investment houses still recommend these stocks.There is one large e-retailer here in Seattle that made no profits in the last 20 years, it has a P-E ratio of 800, it is beyond surreal.You gotta wonder how analysts are doing their analysis and recommendations.I am afraid we are heading to another financial bubble.

  63. Dave

    There are certainly some companies that are in the heat of the boom and seem like they will have a dot com circa 2002 finish…But isn’t a lot of this an inevitable byproduct of delaying going public for later stage companies?I’m mostly knowledgeable in enterprise SaaS businesses where the companies I can think of that have many millions of dollars a month in burn rate also have strong recurring revenue and revenue growth. Not profitable yet, but that is largely by choice as they invest in expanding markets. These are companies that would have been easily public 5 or 10 years ago but now have done late stage growth equity rounds and decided to stay private for an extra few years relative to prior norms. Some could end badly as private companies but they could have ended badly as small public companies (public but before investor liquidity happened) years ago.

  64. Joah Spearman

    I enjoyed both Bill’s writeup and this one from Fred because I imagine they both have a lot of experience with companies burning through a ton of cash. I’m assuming one of these companies Fred is referring is foursquare. They’ve got to be going through millions a month with no clear sign that they’ve had a substantial increase in valuation in the last year or two. I assume they already ate through that $40mm+ debt round USV participated in just last year.

  65. Dave

    Fred–Related question since I’ve been on the enterprise side. When do you cringe about a consumer focused company having a big burn rate and no revenue?In enterprise, you get a better view as you start to scale but also have no real possibility of 1,000% annual revenue growth once you start to generate real revenue unlike a consumer focused company.

  66. howardlindzon

    amen. cash flow is king. especially this late in what is still a cycle

    1. fredwilson

      a belated happy birthday my friend

  67. phineasb

    I see this too and it is scary when a company starts to be built in a way that requires the support of the capital markets rather than the target market. However, I do think there are some legitimate reasons to run at a higher burn these days. Talent is more expensive than ever and this is the primary driver of burn. At the same time, it is no longer good enough to build one product, you have to build for web, iOS and Android at the same time. This takes more people.One driver of increased burn that I don’t see a lot of discussion about (and would love thoughts on) is the shift in the later stage VC mindset to only backing the “clear winner” in a space. As these funds have gotten larger, investors in growth rounds (all the changes in the landscape make letters and labels hard to follow, so I will call this the 3rd/4th round) would rather invest $40M for 10-15% in the “clear winner” than $25M for 15-20% in a strong company in the same interesting market. This trickles down and changes the way founders and investors think at each stage — and makes the whole world feel more binary. When you build for the capital markets, you win or you don’t (you raise money or you don’t) rather than working with the nuance of building a great company over time in a complex and evolving market. This mindset raises expectations for progress relative to competition at each round and shortens time horizons for escape velocity and redefines success. As a founder you get to market dominance by running experiments — and in this market where cash seems cheap at each stage, people are choosing to run many, large experiments. When you are right, you are further ahead. When you are wrong, you waste more. Most founders are doing their fair share of both and rationalizing the higher burn and lower level of learning per dollar spent with belief in the longevity of the current funding environment. It is a lot easier to burn $millions/month when you are convinced that the capital markets will be there to support your approach to experimenting, discovering and dominating the target market for at least as long as it takes you to win.

    1. fredwilson

      It is true that devs cost more and you have to build for three platforms not one these days but I still think revenues have to be greater or at least equal to costs at some point. Its not acceptable to lose money forever just because its costs more to operate the business

  68. Jon Callaghan

    Great post, Fred.Bill’s piece was a great articulation of how I’ve been feeling for a few months. Investors (and Founders) have been heavily discounting capital risk, and timing risk. Like most things in life, capital can help you, and it can really hurt you. Especially too much of it, especially if you spend it over a short period of time, and especially if you take it at high valuations.I’m reminded of the old venture capital / entrepreneur warning that we have assiduously avoided since founding True: beware of the “entrepreneur’s price on the VC’s terms”. Bill points this out, and while “technical” (his words), it is fundamental. Valuation is a very small part of a deal. So many Founders have fallen victim to this trap. .The end is usually not pretty for common shareholders.

    1. fredwilson

      i could not agree with you more Jon

  69. davealbright

    You have every right to be grumpy!It’s important that you you are not the path of least resistance. I feel a portion of the burn rate is a premium on startup’s naivety in terms of business negotiation. Being Grump is a way of increasing the resistance level to stop the retarded decisions they sometimes make to avoid uncomfortable things.Similar to the example you provided; the startup executive negotiating an office lease needs to fear your reaction to the terms they negotiate more than fearing the negotiation process itself. The executive needs to be pitted between you and an office lease broker pitching a long term lease for all the money, rather than their funding and the broker.Great link to BI summary instead of the paywall. New Organizations who put a paywall in front of direct links make no sense!

  70. Reuben Metcalfe

    Having come from a smaller economy (New Zealand, pop: 4.5M) where bootstrapping is the default due to capital being comparatively scarce – I must say that this is about The Least Surprising Thing to see happen to a sector dominated by what many foreign markets would see as ‘Silver Spoon’ operations, which can extend right through leadership, and reflect itself in the expenditure profiles.Whilst some might (accurately, in my opinion) call these kinds of trends and conversations ‘market correction’ type behavior – I wonder if there might be an opportunity here to further expand on that market correction…Why not broaden the scope of investment theses to include un-sexy but quantitatively more efficient/profitable off-shore operations, who generally have lower valuations, and a higher likelihood of spending your money like they’re not expecting any more?

  71. ujf

    I just read the BI article you recommended and my take away is that I better not talk to this guy Bill nor Benchmark nor Fred Wilson and his USV. In fact the very interesting comments underneath the article makes me believe that at least the old bunch of VC’s are shit/dangerous and just killing your startup if you’d engage with them. Thanks FW for making people aware of the article ( and it’s comments)

  72. Emily Merkle


  73. leec

    Then stop funding inexperienced children with features posing as businesses (e.g. Snapchat et al).

    1. Justin Zollars

      While I wouldn’t invest in most startups these days, I would certainly invest in Snapchat. Have you seen data on how much is shared through that platform?

  74. guest

    I think an see…

  75. Mike Okhravi

    Business 101: The goal of any company is to be profitable. There are two sides to being profitable: revenue stream and controlling expenses.There needs to be more urgency to find revenue and run lean. When you make profit, you don’t need to keep calling investors and your existing investors will be there if you do need them.These high sums of capital injection reduce the urgency to make money and provide the companies with a false sense of achievement. It’s nuts.

  76. Gianluca Valentini

    You VCs… aren’t you afraid of overpaying startups? Aren’t you using any methodology to estimate the value of a company? pure instict?

  77. fredwilson

    right. but i am not including any of them in that comment. i guess i could have been more specific. the truth is the companies in our portfolio with hundreds of millions of annual revenues are profitable.

  78. LE

    Leaders often get caught up in their perception of their own self worth, and spend accordingly.Can you give some examples of that?

  79. LE

    Oh come on Charlie. Give us details! Tie in “perception of their own self worth” and “spend accordingly”.

  80. fredwilson

    i like it very much Charlie