The VC industry is experiencing a significant shift as valuations for startups have decreased significantly from their peak in 2021. Entrepreneurs who were used to securing funding at 20-30x multiples on ARR are now seeing multiples of 5-7x on their ARR. In this environment, cash is king, and controlling your burn rate is the most critical metric that investors are looking for. Burn rate is the rate at which a company is spending money to operate and grow. In this new environment, companies that can demonstrate a low burn rate and a clear path to profitability are more likely to secure funding.
As we enter the middle of 2022, the venture capital industry has undergone a significant shift from the environment of sky-high valuations and easy money that we experienced just a year ago. In this new landscape, cash is king, and entrepreneurs need to focus on controlling their burn rate to survive. In this blog post, we discuss the importance of controlling the burn rate and provide references to other venture capital articles that can help entrepreneurs manage their cash and make the tough trade-off decisions that come with a challenging funding environment.
Why Controlling Burn Rate is So Important
Why is controlling your burn rate so important? Simply put, it shows that your company is financially disciplined and can operate efficiently. This is an important metric for every startup, but it is particularly crucial in this lower valuation environment. Investors want to see that you can manage your cash flow and stretch your runway as much as possible. As Jeremy Liew, partner at Lightspeed Venture Partners, explains, “Burn rate has been the single biggest determiner of whether companies survive or not.”
Controlling burn rate means making tough decisions about how to allocate resources. It may mean delaying going after a new category of business or laying off a portion of your workforce. It’s never easy to make these decisions, but they are crucial to keep your business running and to demonstrate to potential investors that you are making sound financial decisions. A good starting point is to examine your burn rate and identify areas where you can cut costs without negatively impacting the long-term growth of your company.
In the current environment, venture capitalists are looking for companies that can demonstrate discipline and a clear path to profitability. They are no longer willing to throw money at startups with the hope of huge returns down the line. Instead, they are looking for companies that can show a clear path to revenue growth and profitability in the near term.
References to Managing Cash in an Uncertain Environment
To help entrepreneurs manage their cash and make the tough trade-off decisions that come with a challenging funding environment, we’ve compiled a list of some of the best articles on the topic:
How to Manage Cash in an Uncertain Environment by Silicon Valley Bank. This article provides some excellent advice on managing cash flow in uncertain times, including how to make tough trade-offs and prioritize spending.
Another useful resource is this article from GuruFocus on why cash is king in a down market. It includes quotes from famous operators about the importance of managing your cash efficiently. For example, Warren Buffet said, “Cash is like oxygen. You don’t notice it until you don’t have it, and then it’s the only thing you notice.”
How to Keep Your Business Afloat in Tough Times by Forbes. This article provides some practical tips on how to reduce costs and control burn rates without sacrificing growth.
Strategies to Keep Your Startup Alive by TechCrunch. This article provides a comprehensive list of strategies that startups can use to survive a downturn, including focusing on revenue growth, reducing burn rate, and delaying new initiatives.
It’s important to remember that you’re not alone in this struggle. Many entrepreneurs are facing the same challenges, and there are resources available to help you navigate this difficult time. One resource to consider is this article from TechCrunch on managing cash in an uncertain environment. It provides guidance on how to make good trade-off decisions that can help you stay afloat in this market.
There are many resources available to help entrepreneurs manage their cash flow in an uncertain environment. For example, Fred Wilson of Union Square Ventures recommends that startups aim to have at least 18-24 months of runway to weather any potential downturns. Other resources, such as the Lean Startup methodology, can also provide guidance on how to make good tradeoff decisions to control your burn rate.
Finally, it’s important to understand why cash is king. Here are a few quotes from famous venture capitalists:
“In times of crisis, cash is king.” – Mark Cuban, entrepreneur and investor.
“Cash is a fact, profit is an opinion.” – Peter Thiel, co-founder of PayPal and early investor in Facebook.
“Cash is like oxygen. You don’t notice it until you don’t have it.” – Marc Andreessen, co-founder of Andreessen Horowitz.
The Path Forward
In conclusion, the current venture capital environment requires entrepreneurs to focus on controlling burn rates and managing their cash. Investors are looking for companies that can demonstrate a clear path to profitability and are no longer willing to throw money at startups without a solid plan. Cash is undeniably king.
By managing their cash effectively and making tough trade-off decisions, entrepreneurs can increase their chances of securing funding and surviving in the long term. It may not be easy, but with discipline and a focus on controlling costs, startups can weather this downturn and emerge stronger on the other side.