Burn Baby Burn - Your Investor’s Cash Up In Flames

I thoroughly enjoyed reading Danielle Morrill’s article about startup burn rates. Particularly the voyeuristic view into the workings and spendings of startups in other countries. But I am absolutely blown away by the immense burn rates and “seed” funding rounds that so many of the startups opened up about.

Receiving a seed round of over $500k dollars is a very large sum of money. And as Danielle rightly points out; what markets are these startups targeting to raise that kind of seed and where to from there? I have to ask if these startups understand the responsibility they have towards their investors, teams and customers. Burning seed funds of that size in the hope of a Series A round of funding is reckless.

Raising funding is not a business model.

I sincerely hope that they have a path to decent revenue and are working on using that funding (and those massive burn rates) to become profitable. Because if they aren’t going after the $1bn markets with a realistic shot of disrupting them, then who the hell is going to continue to fund such massive burn rates for nothing?

Shockingly the only mention of the word “profit” in the article comes from guys I know and respect, the Buffer founders. Why? Because they are profitable. I understand that the article is about burn rates. But a burn rate has to have a view to profitability otherwise your business model is fucked and you’re living in la-la-land.

I’ve built one of those businesses before. I’ve burned my fair share of investor capital and luckily - yes, luckily - I managed to exit successfully before that burn rate bit me in the ass.

Having been down the road of least profit before (and hated every second of it) I prefer to build businesses that generate revenue as soon as possible. Living and building businesses in Cape Town, South Africa is unlike the experiences of entrepreneurs in Silicon Valley or other hubs in the US. We don’t have access to endless amounts of venture capital or high wealth, risk embracing individuals. We have conservative investors that like later stage bootstrapped business that generate…wait for it… revenue and earn…wait for it… profit. Yup, in South Africa it’s most likely that you’ll raise funding if your business is profitable.

This should be the rule and not the exception everywhere in the world; profitable businesses raise more funding. Too many entrepreneurs read Tech Crunch and believe that raising funding is success. It’s not. It’s the start of a load of debt and often a loss of control.

There are very few businesses that can burn money for as long as Twitter did (almost 8 years I believe) without a path to revenue approaching. Most business, 99.5% of them, need revenue coming in to manage the burn.

If you’re burning an exorbitant amount of someone else’s money recklessly then it’s time for you to take stock of your obligations and responsibilities. Be harsh with yourself, your business model, your team and your requirements and figure out if burning $50 000 - $200 000 is reasonable or fashionable.