So one post I’ve written and rewritten on SaaStr several times over the years is how a seemingly OK burn rate can spiral into one you just can’t control. Raise $3m and burn -$50k a month, it’s OK. But then that slowly grows to -$80k. And then -$100k, and then -$120k. And then all of a sudden, the runway looks a lot shorter than you’d thought. Or expected.
I recently did an analysis of my 20 best investments
The 4 that had highest burn rates at $1m ARR .. also did at $10m ARR
The 4 that had lowest burn rates at $1m ARR .. 3/4 still lowest at $10m ARR
All are good ones
The learning is just that a high burn rate is … sticky
— Jason ✨👾SaaStr.AI Sept 10-12✨ Lemkin (@jasonlk) July 11, 2024
But why? Why do burn rates spiral out of control? Founders aren’t stupid. But there’s a lot going on, and a lot of forces pulling on startups.
Generally I’ve seen three reasons burn-rates spiral out of control:
#1. High churn companies expanding rapidly.
This doesn’t always happen with high churn SaaS companies, but it happens too often. Many SMB SaaS companies have high churn in the early days. Even HubSpot struggled to hit 85% NRR in the early days. It’s part of selling to SMBs, and it often takes SMB startups years to figure out how to get to 100%+ NRR. And so what can happen is CLTV/CAC ends up much different than most expect. You really can’t spend at traditional SaaS sales and marketing levels if your customers don’t even last 12 months. It becomes a cash-burning machine. And founders often react by — spending even more. To keep the growth up.
#2. “Burn the bridges” founders that just roll the dice more money will always come.
This isn’t just a ZIRP thing or a unicorn thing. But it does usually take raising $10m+ before founders start to think this way. After that though, too many do. If the last round was easy to raise (or even if it wasn’t), some choose to live in a delusional world where the next round will be just as easy. Even if the metrics are worse.
I’ve seen this too many times. The other day, I caught up with a founder that had raised a nice $15m Series A at $2m ARR growing over 100%. Today? They’re at $14m ARR. But only growing 30%. And burning $1m a month. He was confident he’d be able to raise “another $20m soon”. But from where? I’m worried.
#3. Bootstrapped and first-time founders who have been super efficient so don’t quite see how spending compounds after they finally raise.
Ok this one is the subtlest of all but I see it happen all the time. Founders that have been super scrappy raise a round for the first time, or a bigger round for the first time, and get just a little less scrappy. And look, that’s the goal of the capital. To invest. So they hire a VP or two. And a few more reps. And spend a bit more in marketing. And at first … it’s OK. The burn rate goes from say $0 or small to an OK amount. But then those VPs need a few directors. And the marketing budget needs to expand to support sales. And half the new reps were hired too quickly and don’t hit quota. And soon, the burn rate just sneaks up on you. It doesn’t feel like anyone is wasting money. Or that the company is too big. But there just wasn’t quite enough discipline on the spend. And then the burn rate ends up 30%-50% higher than is sustainable. This happens to the best of us. Especially without a great controller or someone truly focused on every single month — every single month — not exceeding the Burn Rate Budget.
Whatever you do, set a Burn Rate Budget for each month and quarter. And make sure you hit it.
More on that here:
And a bit more on the 3 root causes here from a recent SaaStr Workshop Wednesday:
(image from here)
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Jason Lemkin, Khareem Sudlow
