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Venture Capitalists Sound Alarm on High-Burn Rate Companies

9/26/2014

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Over the past two weeks, three prominent venture capitalists have warned of venture-backed companies that have high burn rates (the rate at which the company is spending cash).  

First, in a Wall Street Journal interview (subscription), Bill Gurley of Benchmark Capital indicated that he thought that "Silicon Valley as a whole, or that the venture-capital community or startup community, is taking on an excessive amount of risk right now -- unprecedented since '99" (referring to the internet/tech bubble of the late 90's that peaked in 2000).  He makes two points: (1) the burn rate at the average venture-backed company are at very high rates; and (2) more people are working for money-losing companies than since the bubble.  This is a very good interview that is a worthwhile read.

Next, Fred Wilson of Union Square Ventures wrote a post on his AVC blog echoing and expanding on Bill Gurley's comments.  Fred discusses how burn rates are "sky high" right now.  He also cautions entrepreneurs that "[a]t some point you have to build a real business, generate real profits, sustain the company without the largess of investor's [sic] capital, and start producing value the old fashioned way."

Now, Marc Andreessen of Andreessen Horowitz has echoed Bill Gurley's and Fred Wilson's comments on burn rate in a Tweetstorm.  In this Tweetstorm he agrees with Bill and Fred, and expands with the following thoughts:
  • New founders in the last 10 years have been in an environment where money is easy to raise at higher valuations, and this environment will not last.
  • High burn rates are dangerous in several ways, which he outlines in his Tweetstorm and how companies that aren't wary may end up vaporizing.
  • When the market turns, M&A mostly stops and cash burning companies will not be attractive acquisition candidates.  This could lead these companies to vaporize as well.

Andreessen ends with the final word: Worry.

In my view, the above comments from these highly successful and respected venture capitalists should be heeded by entrepreneurs.  Moreover, venture capital fund investors should also take note of this, as I believe it is yet another indication that we may be at or nearing the peak of a venture capital cycle.

Link to Bill Gurley WSJ interview:
http://online.wsj.com/articles/venture-capitalist-sounds-alarm-on-silicon-valley-risk-1410740054?

Link to Fred Wilson blog post:
http://avc.com/2014/09/burn-baby-burn/

Link to Mark Andreessen's Tweetstorm:
https://twitter.com/pngmarca/status/515223834266324992/photo/1


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Allen Latta Speaking at the LP-GP Summit in New York Next Week

9/11/2014

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I'm pleased to have been invited to speak at the LP-GP Summit next Thursday and Friday 9/18-19 in New York.  The conference website is here:  http://www.partnerconnectevents.com/events/lp_gp_summit_2014/

I will be speaking on two panels relating to venture capital returns.  The first is "Will Recent VC Returns Persist?  Or is it Too Late To Join The Party?" on Thursday at 2:00 pm.  The second is "Why Now Is The Best Time To Put Your Money In VC" on Friday at 10:30 am.

Come here me speak!


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