Is My Startup Burn Rate Normal?

https://medium.com/@DanielleMorrill/is-my-startup-burn-rate-normal-882b2bd20f02

by nreece • 12 years ago

142 94 12 years ago

prottmann• 12 years ago

Really interesting, but i think that it is the wrong question.

Only you can answer: did you have enough people - and the matching people - to get the job in time X done and reach your goals?

You can compare your values only the similar startups, that work on the same problem. Then you now if you pay too much/less or use the wrong structures (inhouse / outsourcing / ...).

danieltillett17• 12 years ago

The question is really impossible to answer as it depends on forces outside your control such as the willingness of investors to invest. They can switch on and off at anytime with no warning.

From my outsiders perspective you want to have the ability to become cash flow positive within 3 months if you need to. Also keep in mind if this is going to be possible if the funding environment changes - if your customers are also dependant on investor funding then this is going to be very hard as the start ups from 2000 found out.

x0x02• 12 years ago

that's the trick, isn't it -- it's not so much your burn rate, because you understand that; it's what your customers cut if they decide there's a bubble. eg yahoo during the dotcom bubble: huge chunks of vc were flowing through to yahoo ads.

That said, I don't know what Fred means, but $10k/engineer is ridiculous. That's earning well under $100k/year by the time an employer pays social security, health insurance, employment taxes, and rent. You have to be smoking crack to live in sf, home of the $3k/mo apartment, and earn so little money. A standard rule of thumb, more common in nyc than here, is your gross income needs to be 40x your rent.

diminish• 12 years ago

Do you mean your yearly income must be 40x your monthly rent?

danieltillett17• 12 years ago

but $10k/engineer is ridiculous

This is net, not gross burn. Assuming you have a viable product you should be earning (some) income.

kanwisher• 12 years ago

$10k a head is typically averaged across all your functions, engineering being higher and almost every other function under $10k

onion2k2• 12 years ago

The question is really impossible to answer as it depends on forces outside your control such as the willingness of investors to invest.

One of the things I've seen a lot of in startups is people failing to understand the difference between planning and strategy. Every startup has a plan - a detailed list of things that they're going to do. Hopefully the founders update the plan as they get new data. If they fail to execute that plan they're often "Well, things happened that we had no control over!" and the startup dies.

What startups need is a strategy. The difference between planning and strategy is that a strategy accounts for things that are uncertain and beyond your control. There is a huge difference between "Our marketing burn is $3000/month because Facebook ads are $100/day" and "We'll spend $3000/month on marketing, split between Facebook and Twitter, skewed to Facebook while our acquisition cost is $0.5/user but shifting towards Twitter if Facebook ad prices start to ramp up as they get less effective." The first is planning. The second is strategy.

So yes, success depends on things outside of your control but if you fail because of that then it's still your fault.

danieltillett17• 12 years ago

So yes, success depends on things outside of your control but if you fail because of that then it's still your fault.

Unless the forces are so strong that it doesn't matter what plan you have in place.

I lived through the 2000 crash (Genomics, but it was basically as crazy as the dotcom area) and survived. I wish I could say it was due to my better planning, but mostly it was luck. When the forces of finance really turn it washes away both the good and bad planners.

pearjuice• 12 years ago

I think this is another indication of how many startups are absolutely out of control in terms of finances. But does it matter? As long as the long stream of capital injections without meaningful profit to show up for doesn't stop, it doesn't matter in the slightest.

Looking at those SaaS companies which have employee burn rates way above their salaries and absolute cost, you can only conclude that they are overspending. And that's not something to be proud kf. It actually bothers me how burn rate is artificially increased (ex. redecorating the office periodically, A-office location) just to show how "fast" a startup is moving.

It is wrong on so many levels but as long as there are investors which keep pumping air into the bubble, we are safe, right!?

myrandomcomment• 12 years ago

Wow. Not sure even what to make of this. I think the real answer is who cares? If you have the right product and if you have the right backing then your burn should be the right number not to tap out the backing to get to what you (founders) and investor feel is the right place to cover your nut. If you need to burn money for a long time then you had better hope you backers are all in on the company. Either it is the right place to "burn" the money for the long haul or get out. I am on my 5th startup and have a had a hit or two to the point that I do not need to work. In the hits it was because the investors were in it for the long game, they believed in you and the idea and would do right to see it get there. The topic of burn never came up if you were doing the right thing for the successes of the company. In my experience, if the investors were focussed on the burn as anything more then "what number gets us there" then you were likely to fail.

danieltillett17• 12 years ago

The problem is investors don't care about burn until they all decide at the same time that it is the only thing they care about.

richmarr2• 12 years ago

VCs don't care about burn rate. They care about founders who don't care about burn rate.

revelation• 12 years ago

Love the discussion. VC investors waking up all sweaty in the night, having their micromanagement self telling them "these kids are going to get us rich, but they better not use too much money doing it!". If you want to hedge your bets, buy index funds.

boracay• 12 years ago

Uhm, I don't know. If there's one area where VCs have far greater understanding than the average startup founder, it's things like resource management. That doesn't mean VCs should make decisions for you, but they should be able to help when it comes to e.g. how long you keep your legacy product going while pivoting.

The reason that "startups rarely die in mid keystroke" is that they run out of steering way before they run out of fuel.

othmanaba• 12 years ago

Rule of thumb is 100k for prototype in 2 months. 1million for a full product in 1 year.

colinramsay• 12 years ago

Whose rule of thumb?

muyuu3• 12 years ago

othmanaba's

richmarr2• 12 years ago

Bargain! I'd like cures for cancer and malaria, an interstellar space program, an app that builds other apps without coding, and an O(1) solution to the travelling salesman problem. kthxbye!

herge• 12 years ago

I'll try my hand at all 5 for 5 million.

jayvanguard• 12 years ago

The 1 million sounds about right but the 100k doesn't. How on earth do you staff up quickly enough in two months to get tho that burn rate?

Or if that is contracting fees then it isn't really part of your consistent burn rate.

adwf2• 12 years ago

I don't think I've seen the phrase "ramen profitable" mentioned for years now. I remember a few years back it used to be the mantra here, is it taught at YC anymore?

bollix• 12 years ago

There doesn't seem to be as much desire to get profitable any more. Why bother with that when you can just get acquihired by bigco.

ingenieros• 12 years ago

Ramen? pfft, these days is all about stealing from Whole Foods.

dmor5• 12 years ago

It is absolutely still taught -- it gives you control over your future which is very important. From my post:

"We’ve had two break even months. The first was by accident in October 2013 because we had an unexpected revenue spike. For a moment we felt what it would be like to completely control our own destiny. The second time was in February 2014, because low growth in December scared the living shit out of us and it didn’t look like our Series A was going to come together."

madaxe_again8• 12 years ago

This is utterly batshit. $10k+ per head as your burn rate???!?

We're a 30 person org. We burn about £80k a month - $125k. Our revenues are well in excess of that. That includes rent, salaries, and all other expenses.

Then again, I guess when you're playing with your own cash, which started as nothing because you bootstrapped, you look at things differently, and don't put "35 foosball tables, offices in manhattan and the valley, and a corporate getaway to the Maldives" at the top of your "essentials" list.

I see more and more of what I call "startup dickwaving", whereby people compare metrics on a fairly meaningless basis and act as members of a cute little club of oh aren't we all so special, rather than, y'know, BUSINESS, happening.

jurassic• 12 years ago

$125k/month works out to $50k/yr/person. In case anybody else was wondering.

adwf2• 12 years ago

Means around £30k per employee which is reasonable for UK junior-ish dev straight out of university, but low if they're based in London (I dunno).

arethuza2• 12 years ago

"Our revenues are well in excess of that."

Doesn't burn rate cash flow indicate negative cash flow - so if your revenues are much higher that what you are spending then you don't really have a burn rate in the normal sense as you are cash flow positive?

danieltillett17• 12 years ago

The op did say burn not burn rate. I think quite a few of the disagreements here are the result of us not being clear about what we mean by different terms. Burn rate is negative cash flow so cash income - cash expenses.

madaxe_again8• 12 years ago

Sure - was using burn rate in terms of "we burn this much cash a month" - but we also have income, which is greater than our expenses.

fmavituna• 12 years ago

£30K a year, tax etc. on top of it. Do you do tech business or something else? Office costs, extra overhead, insurance etc. It's really hard to run a company that cheap. This is not about "offices in manhattan". Even one office in the UK around a decent place for 30 people will be quite expensive to run.

I'm just curious, is this is tech company, how many of those people are developers / designers (high skill required tech workers)? How is it really possibly to run a company that cheap in the UK?

I would love to hear the things that you do for lowering the costs.

madaxe_again8• 12 years ago

Tech. 22 technical. 8 management. Wouldn't be hanging out here if I made coat-hangers for a living. :)

We accrued cash and bought a commercial lease with a decade to run from a bankrupt company - prime real estate in the centre of a creative city. Before here, we based ourselves out of a squat, and after we left agreed a retroactive amount of rates to pay the council to turn a blind eye to our having been there. It really pays to shirk estate agents and to instead do "huh, that building is suddenly empty - let's call the owner".

Insurance is also surprisingly cheap, so long as you indemnify yourself against consequential loss, which in our business is a must.

"Extra overhead" runs to not much - maybe a few £k a month.

Oh, and this isn't included in my figure, but is something EVERYBODY WHO RUNS A TECH BUSINESS IN THE UK SHOULD BE AWARE OF - R&D Tax Credits! HMRC cut us a cheque every April.

I'd actually rather we spend a bit more and perhaps become unprofitable for a while, as I want to invest in growth more heavily, but my partner, the loveable tightwad that he is, needs deep justification for every penny spent.

And that's the crux of it. Go into business with the tightest person you know, and spend forever fighting about it, and end up with pretty optimal budgetary decisions, as everything has to be thought/fought about.

taytus2• 12 years ago

I know, I know...startup = explosive growth. But... It's hard for me to consider something a "startup" when you have more than 1M in the bank and spending 60K monthly. That's a company!

frostmatthew• 12 years ago

I know, I know...startup = explosive growth.

Actually, startup = a company, a partnership or temporary organization designed to search for a repeatable and scalable business model[1]

[1] https://en.wikipedia.org/wiki/Startup_company

taytus2• 12 years ago

You're right, I was using PG's definition http://www.paulgraham.com/growth.html

kayhi• 12 years ago

"You are expected to tackle a $1 Billion opportunity and achieve hyper-growth (100% year-over-year or more)."

Aren't VC back start ups looking for way more than 100% growth per a year? I was under the impression the target is 10-20% growth per a month in revenue. In other words 100% growth is so low it would likely prevent you from staying on the VC back track.

dmor5• 12 years ago

If you can grow faster than by all means do! The 10-20% guidance you get in YC is not realistic as you get bigger, smart VCs are much more realistic about revenue growth (given it is recurring and you don't have to pay to acquire that revenue again each month).

bane6• 12 years ago

Startups are a business, and part of business is understanding what every cost is. Part of that is understanding what a "fully burdened" employee costs, it's well over what their salary is.

Understanding what's "normal" is tougher. TBH, "normal" is whatever you're burning if you aren't wasting money.

A decent WAG at how much money you need to keep a mid-level employee employed for a year is about $250k, it doesn't matter much where, but you might inflate that a bit for SF or NYC, and drop it a bit for Nowhere'sville, Nebraska. That's salary ($100k plus or minus), benefits, office space, administrative overhead, vacation, etc.

You'll want to earn more than that, on average, per employee per year, to be profitable.

It's useful in other algebraic ways to get a gauge on other company's burn rates, size, or needed revenue.

For example, your competitor might advertise that they have 200 employees. That means they operating a $50m/year business to break even. A reasonable target for basic sustainment and growth is $300k/employee/year so they'd need to be a $60m/year business to be growing.

Here's some real world examples:

   Company     - Revenue        - Employees - Average/employee/year
   Oracle Corp - $38.27b (2014) - 122,458   - $312,515
   Microsoft   - $86.83b (2014) - 128,076   - $677,956
   Facebook    - $7.87b  (2013) - 8,348     - $942,740
   Sony        - $66.12b (2014) - 140,900   - $469,268
   Google      - $59.83b (2013) - 55,030    - $1.09m
   Apple       - $182.8b (2014) - 98,000    - $1.87m
   Radio Shack - $4.473b (2010) - 36,400    - $122,884
   Amazon      - $74.45b (2013) - 132,600   - $561,463
   Lockheed    - $45.358 (2013) - 116,000   - $391,017
   Boeing      - $86.623 (2013) - 168,421   - $514,324
   Leidos      - $7b (prj 2014) - 22,000    - $318,181
   SAIC        - $3.8b          - 13,000    - $292,307
   Tesla       - $2b     (2013) - 10,000    - $200,000
   Ford        - $147b   (2013) - 181,000   - $812,154
   Nokia       - $15,85b (2013) - 55,025    - $288,050

Now look down this list and think about who's considered wildly successful and hot and who's considered on the way out, in the doldrums or has had recent sell-offs or splits in the company. This isn't perfectly scientific, just a guideline.

Startups have a slight advantage in that you can sometimes hire employees at a lower salary in exchange for options. This can temporarily deflate the costs and let you beat these guidelines for a while. But ultimately you'll run out of paper to give out and you'll have to start paying people what they're worth.

However, Startup founders, especially first timers, are often at a disadvantage because they've never had to handle so much money before. One startup I was at had a changeover in CEOs and an analysis of non-employee expenses under the previous CEO showed a $30k/mo travel expense for him and the CTO.

Turns out the previous CEO and CTO were doing all their business traveling for sales in business class. We had been chronically understaffed. The new CEO cut the travel and hired an outside and inside sales-person for about the same and revenue started increasing shortly thereafter. Interoffice communications was turned into weekly phone conferences and communication even improved.

Don't spend your money in stupid ways and you'll have more to put behind the business.

ryanSrich2• 12 years ago

Turns out the previous CEO and CTO were doing all their business traveling for sales in business class

This simply can't be attributed to "it's their first time". This is selfish, reckless, and inexcusable. How did this even fly with their investors?

bane6• 12 years ago

I agree, but the C-level execs answer to the Board, not necessarily to their investors. If the Board also all flew out to the meeting in business class, and 2 of the seats on the board are the CEO and CTO, it's not hard to imagine it being something they're overlooking.

I've found that boards for most startups are surprisingly light handed and non-guiding in their approach. They're really supposed to be there to advise, make connections, vote on major corporate decisions, etc. a monthly $15k expense for C-level execs as a sales/marketing expense (when the total investment is millions) is a small detail for the board to be sweating over. They care if revenue is growing, is growth is sustaining, etc.

emjaygee2• 12 years ago

Revenue per employee is certainly interesting but isn't comparable to the topic of discussion. It would be very interesting to see what the run rates for each of these enterprises is. I suspect you could compute this from the annual statements.

It would be even more interesting to see it broken down by employment category. Amazon's 132,600 employees probably includes a large number of pickers and packers diluting the comparison, whereas Oracle's, Microsoft's and Google's staff are predominantly technical.

bane6• 12 years ago

Revenue per employee is certainly interesting but isn't comparable to the topic of discussion.

Sure it is. A startup's burn-rate is almost all in staff. If you have 10 employees, then your yearly burn rate is going to be not that far off the FBR for those 10 employees (~$2.5m/yr), unless you're in some very capital intensive business (hardware manufacture or something).

But 10 employees working on a photo sharing app or whatever is ~$200k/mo. Your hosting fees, etc. are unlikely to be more than a few percent delta off of that.

Yeah, yeah, I'm sure there is this or that exception. But in your revenue model for your company you'll need to build all that in. For example, if your hosting fees cost another $100k/mo for whatever reason, and it's growing 5% a month, you better figure that in.

If you're making a physical doodad, and your upfront capital costs are $1m and the per-unit manufacturing costs are $10/item you better figure out how to cover the manufacturing costs, as well as recoup the upfront costs + marketing + sales staff + shipping + expected returns before thinking of the extra over the per-unit sales as profit.

Too many startups discount these things or write them off. They make a doodad for $10/unit, then sell it at $100/unit then congratulate themselves on the $90/unit profit they're making. Then they run out of business because they forgot that they're spending $50/unit on marketing and $50/unit on shipping, support, returns, warehouse loss, etc.

The problem is that the question "Is My Startup Burn Rate Normal?" is a bad question. You shouldn't really be comparing your burn rate to anybody else's. You should be comparing your burn rate to revenue and profit goals and adjust accordingly.

applecore• 12 years ago

Your examples are all massive companies—for a Series A startup, the fully-loaded "cost" of an employee is probably closer to $200K per year. For a startup that's just raised seed capital, it's probably around $10K per month.

bane6• 12 years ago

Well yeah, you hear of founder-only companies fresh off their first round sharing a cheap apartment and taking almost nothing for salary to get things off the ground.

The FBR for a Jr. Dev (maybe employee #1 or 2) obviously isn't going to be $250k/yr.

At those really low head counts, things really do look different, I agree. But it's like saying growing sales from 1-to-2 units is a doubling in growth. At small scale, everything looks weird. However, once you hit ~10 people the numbers start to line up and they tend to hold even through 100,000 person companies.

It's kind of amazing actually, if you run a company with >10 employees, look at your yearly costs divided by employees. I can almost guarantee that if that number is <$250k/employee/year you're feeling uncomfortable and stressed out month-to-month and if it's >= $250k/employee/year you're feeling like you're growing.

This is important because, unless you've decided to run a lifestyle business and not grow your headcount, you're going to have to keep an eye on this number as a target to sustain. If you can hit it year after year you can stay alive and grow.

Yeah the money has to come from somewhere, if it's not coming from sales, it's coming from VC money.

rajacombinator2• 12 years ago

Could someone break down how you get to 250k (or even 200k) on a "100k plus or minus" salary?? I'm thinking back of the envelope maybe 12k payroll tax, 6k health insurance, 6k office space ... What am I missing?

bane6• 12 years ago

It's rule of thumb, so don't take it too literally,

Here's a guide that shows how a $150k/yr employee ends up costing a bit over $250k/yr.

http://research.unc.edu/offices/sponsored-research/policies-...

Here's WP's take on it

https://en.wikipedia.org/wiki/Labor_burden

Labor burden cost is important to compute and understand because it includes a variety of significant costs that are often viewed as company overhead, but are in fact, costs related to employment. Many businesses fail because they focus simply on payroll and payroll taxes, and neglect to consider the entire actual cost required to enable an employee to perform the work he or she was hired to do. Fully burdened costs for individual employees can be expressed as a yearly total to provide an estimate of how much the company will spend that year on an employee. It can also be expressed as an hourly cost by dividing the total yearly cost by the number of hours the employee will work. This number is often 50% to 150% higher than the gross hourly wage. As costs are often used as the basis for pricing services or products, this is why it is so critical to obtain an in-depth understanding of the true cost of an employee.

And some more http://www.sleeter.com/supplemental/articles/Labor_Burden_Gi...

edit

Actually, I have an old "new employee, this is what you cost us" sheet a firm gave me a while ago when I worked for them. My salary then was ~$130k/yr

Here's their breakdown:

- 401(k) matching - (variable but the max was) $13k

- Medical - $17k

- Dental - $1k

- Life Insurance - $600

- Long Term Care Insurance - $200

- Social Security - $10k

- Leave - $10k

- Holidays - $5k

- Other benefits - $2700

total benefits: ~$60k

Add in administrative staff, facilities people, security, office space, gym, various other insurances, transit reimbursement, educational opportunities etc and that number easily hit $100k. So my personal burdened rate was about $230k/yr.

Some employees also simply cost more for various reasons and averaged even higher numbers across the board. I think one time I saw the figure and it was something like $260k/yr/employee and there was lots of distress over that being about $20k too high.

The flip side is that we charged out for around $300k-$600k/yr depending on the job.

emjaygee2• 12 years ago

I find this disturbing. I realize that startups are usually associated with non-linear returns but assuming the burn rate in the OP is about gross expenses, not just net burndown of the funding, I think that there's a huge problem with hiring the cheapest engineers hoping to make big bucks from the IPO rather than the best engineers who can solve the problem in a reasonable manner.

This speaks to the problem with demand for entry level (meaning cheap) folks in the tech sector as well as the disruption culture over delivering long term customer value.

iblaine• 12 years ago

The ironic part, "Mattermark is a data platform for venture capital companies"

I wonder what Mattermark says about their own company.

danieltillett17• 12 years ago

Mattermark should not really worry about burn rate for this reason. It only has any revenue if the current funding party continues and if it does then they can continue to raise as much money as they like. If the market turns then their income will evaporate to nothing and burn rate will be the least of their worries.

maaku2• 12 years ago

Who the fuck cares if you burn rate is "normal." The only question that matters is is it higher than it could be? Where can you cut costs and get away with it? If your startup is perfectly on the median, that means half the startups out there are doing better than you. 9 out of 10 startups fail. Are you sure you want to be in the 50th percentile?

kordless• 12 years ago

Cutting a cost simply to cut cost is myopic. A better way to look at it is to shop for value where you can get the biggest returns. Being anal about every little minutia, as the CEO at least, is a massive waste of time.

maaku2• 12 years ago

From the GP:

Where can you cut costs and get away with it?

The second clause is just as important.

curiously• 12 years ago

six digit burn rates just for building a web app with HTML and Javascript?

wooyi• 12 years ago

Lots of commenters are focusing on the high burn rate and missing the point of the article.

If you have product market fit, high growth rates (20-30% MOM) and a large market (>$1B), you can rationalize burning that much.

For the rest of us, normal people. It's back to business basics, which is spend less than you earn. That's all.

danieltillett17• 12 years ago

The problem is it is very easy to fool yourself that you have these things when you don't really. There is the slight problem of redemption rights that pop up when your investors work out you are just a normal business.

Is My Startup Burn Rate Normal?

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