Netscape founder and Andreessen Horowitz partner Marc Andreessen has joined the chorus of people warning that startups are taking on too much risk and burning too much cash.
The so-called startup burn rate conversation was sparked by Benchmark's Bill Gurley, who recently told The Wall Street Journal that "Silicon Valley as a whole ... is taking on an excessive amount of risk right now." He believes startups are burning a dangerous amount of cash--an amount that resembles 1999 just before the dotcom bubble burst.
Here was Andreessen's own warning on Twitter: "When the market turns, and it will turn, we will find out who has been swimming without trunks on. Many high burn rate companies will VAPORIZE."
Over the past few years, it's been relatively easy for startups to raise money from venture capitalists. In some cases, they're raising hundreds of millions of dollars to keep their companies afloat. But behind the scenes, they're plowing through that money either on marketing, overhead, or some other expense, which results in high burn rates. These bloated companies are using their millions to hide serious flaws in their business models.
Union Square Ventures' Fred Wilson agreed with Gurley, stating: "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."
Wilson's firm has invested in companies such as MongoDB, Twitter, Foursquare, Zynga and Tumblr. Gurley's has invested in Snapchat, Uber, OpenTable and Yelp. Now Andreessen, who's an investor in Pinterest, Foursquare and Fab, also says the tech world should be worried.
High burn rates are dangerous for a few reasons. Andreessen explains:
- High burn prevents a company from being able to adapt quickly if the market changes.
- Excessive amounts of capital allow companies to hire like crazy rather than operate efficiently. Hiring is an easy-sounding solution to many problems startups face. But once a startup stops being lean, it can become slow to execute and mismanaged.
- Raising a lot of money gives the illusion that a startup has made it: salaries can be high, offices can be glamorous, and it can make employees feel a false sense of relief, like all its hard work is done.
- When you're a bloated company, raising money to support that size operation can be hard to do. "High cash burn startups almost never survive down rounds. VAPORIZE," Andreessen reiterates.
- When the market turns, big companies stop buying startups. And if you have a high burn rate, no one will buy you.
Andreessen's final message to the tech industry: