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:
Link to Fred Wilson blog post:
Link to Mark Andreessen's Tweetstorm: