On burn rate

Fred Wilson's latest blogpost on the topic of "burn rate" is fairly practical and worth reading for all entrepreneurs, whether they're doing SaaS or not.

Specifically I like what he said here:

Your company’s annual value creation (valuation at the end of the year minus valuation at the start of the year) should be a multiple of the cash your company has consumed during the year.

That seems simple and obvious and that is a good thing.

But in order to make this work you need to lock down two things;

(1) how are you going to objectively measure valuation absent a financing event?

(2) what is the multiple?

The latter one is easier I think. The multiple should be large. 1x is clearly not enough. I don’t think 2x is either. 3x is borderline. I like 5x. I would want a 5x return on my annual burn.

— Fred Wilson

What Fred's describing here is actually capital efficiency. During the go-go years of 2014-2015 when founders raised tons of money in mega-rounds, many forgot that the sheer loads of capital was meant to create even more values, even if only on paper. Some of them chose to burn for the sake of burning, without thinking about value creation. And obviously some flamed out during the great correction in 2016.

For a 5X value creation on annual burn, it's still a capital efficiency of 5X. Not spectacular but if we're talking about $50M annual burn or $200M here, it's very respectable and could generate good returns for everyone.

For early stage obviously we want to see a lot higher numbers. Some good startups could achieve 20X to 40X when they successfully raised Series A since they had only raised a small Seed and moved very fast.

On convertibles

Why founders should care about current IPOs