The startup community has been in a tizzy recently about burn rates. Venture capitalist Bill Gurley kicked off the frenzy with a WSJ piece on the issue, and other high-profile investors, including Fred Wilson, quickly jumped on the burn rate hand-wringing bandwagon. Come a downturn and "many high burn rate co's will VAPORIZE," Marc Andreessen ominously warned on Twitter.
So suppose you're a prudent founder listening to this debate and very much wishing to avoid vaporizing the startup you've shed blood, sweat, and tears to get going. With heavyweights like these all in agreement, no doubt you're keen to keep your burn rate to a healthy level. Now all you need to know is: What is a healthy level?
Mattermark CEO and co-founder Danielle Morrill has written a Medium post that is, essentially, the answer to your prayers. She not only offers her own company's burn rate but also shares those of several others that volunteered to publicly publish them, as well as discussing what constitutes a "healthy" burn rate for a startup in the current bubbly environment.
What's a Normal Burn Rate?
The post is well worth a read in full if you're concerned about the issue, but to give those interested a preview of her conclusions, here's a quick peak. She starts off by referencing a 2011 post from Fred Wilson that suggests a good rule is to "multiply the number of people on the team by $10K to get the monthly burn. That is not the number you pay an employee. That is the 'fully burdened' cost of a person including rent and other costs."
But Morrill notes that, thanks to the frothy startup scene, costs have risen since the post was written. So what's the new rule? On Twitter, Morrill asked, "What is the average fully burdened cost per employee at Series A startups over time?"
Andreessen replied with an estimate of $200,000 per year.
"That's $16,666 per month--a 67% increase from Fred's rule of thumb," notes Morrill.
That's one theory of "normal" burn rate, but obviously what's healthy and necessary for one startup is ludicrous for another. "Definitely don't try to scale your team the way we have if you don't have the kind of revenue growth we have. We've been ringing the freaking cash register all along the way so we can offer market rate salaries and really good health care, and without it this hiring would be impossible," insists Morrill, for example.
What questions should you ask if you're looking to determine how your company's burn rate should compare to this rule? Morrill suggests many questions to ask, including:
- Do we truly have product/market fit?
- Am I scaling up hiring because we have a real need, or am I stockpiling talent because people keep telling me it's an arms race?
- Is more than 5 percent of my budget going to things outside of payroll, payroll tax, benefits, and rent?
- Am I spending like we're chasing a big market, when it's actually a small one?
- Is the kind of growth we're seeing sustainable beyond the first six months?
- Am I willing to do what is required to get to break even?
She also offers an explanation for what you need to think about around each question, so check out the post in full for much more detail.
Has the recent debate made you take a harder look at your startup's burn rate?