Banned Words: Burn Rate

With all due respect to my fellow VCs and investment types around the globe, we need to ban or seriously curtail the words burn rate especially with start up/pre-revenue companies.

In my opinion, asking a start-up entrepreneur “What’s your burn rate” is insulting and assumes, out of the gate, this person doesn’t know the difference between investing and burning money.  If she is spending a million dollars over the next year to build a product, that’s not ‘burning money’ that is investing it which is what they are supposed to do.

For true Start-Ups/Pre-Revenue companies, my tips:

• If you get asked that question, respond we don’t have a burn rate. Pause for the knee jerk snarky comments and reactions.  Then simply reply here is our capital investment schedule.  Bring somebody else to your meeting to watch the VC body language. You’ll know more from this interchange then all the Colin Powell hires on the planet.
• Put investment schedule into your presentations and lexicon. Change the rules on how the conversation happens.

 Technorati is currently a free service that has dived, head long, into the new world of blogs, traffic measurement, etc.  Free.  David Sifry, the founder and CEO, is currently getting hammered all over the internet because of performance issues associated with his massive growth. A free service that is currently using money from Mobius and Draper to build the company as well as having some advisors (Doc Searls being one of them) guiding them on products. 

Free. More or less, pre-revenue.

It seems to me “burn rate” would be a fairly dumb conversation to be having around the board table. There is a working thesis and investment required to get there. If, at the end of the day, all the money is gone and there is wreckage where a business should be; fine, burned, pissed away, flushed, etc, all might apply.

But in my view, we should collectively stop over using the words burn rate and focus on what matters; that being what’s the thesis, what’s required to make it work and how are we going to measure/adjust as we go.

Random additional thought.

Technorati is a great poster child for what’s happening with “free” becoming the norm and people’s reactions to it.  Over the air TV, like watching ABC with your rabbit ears is free. If you think a program stinks, you don’t think ah, whatever, it was free. Nope, you complain. Your time was wasted, you had to sit through commercials, whatever, but you bitch about it and feel totally fine doing the complaining.

In reading all the complaints about Technorati, I’m struck by the fact the people doing the complaining, complain with the zeal of somebody who paid for it or otherwise has an expectation of service/delivery that is, in my view, somewhat disproportionate to “free.”  I understand all reactions people are going to have to that remark, I really do.

I wonder if Technorati had “beta” slapped all over it or “don’t use in production” warnings, would it make a difference.

I’m not sure it is all that healthy to have an environment that is so, almost caustic, when it comes to new companies being so open/public (and free) as they try things out.  In order for the participatory model to work, you’d think some level of civility and ‘cut em a break’ thinking should be entering the mix.  Maybe not, maybe this is just the wild west 100 years later and frontier justice is going to continue for awhile.

Fascinating to watch.  Good luck, David.

Comments

[David Sifry]

Thanks for the interesting thoughts and feedback. But it is ok, we're in the big leagues, and we're focusing on being of service to our users. So when we have glitches, like we had the past couple of weeks, our GREAT users let us know about it. Listening to your users is a hard discipline to get used to, but boy is it great. And it has helped us to understand ourselves better, as well as more deeply understand what our users want.

BTW, we just rolled out a bunch of bug fixes and performance improvements, please do go and have a look at the site and try out some searches. Not everything is consistently fast, and there are still some searches that time out, but things should be significantly better than before...

And we're going to continue to work and improve and focus on being of service to our fantastic users.

Dave

[Matt]

I don't even use technorati, let alone know the innards of their business...but nevertheless I'm with David. The worst customers aren't the ones who complain, they're the ones who DON'T complain. The ones who just suddenly up and leave one day, that you have to chase after and beg them to tell you why.

Every customer who complains is teaching me as a proprietor something that I probably couldn't learn any other way, but certainly and obviously _haven't_ learned any other way. Something I _need to know_.

How much they've paid (or not) for the service doesn't enter into that consideration. Every customer complaint is a datum of strategic market intelligence being handed to my company at no charge and with no extra effort on our part to collect it. Are you really going to walk away from an opportunity like that, just because they haven't PAID YOU for the privilege?

(Of course, unlike Technorati, in my business you're not a customer until you've paid us. But if I could get detailed complaints from people who have used the software and previewed the service but didn't sign up, I'd not merely accept them graciously, I'd consider it a gift from Heaven.)

[Rick Segal]

Matt,
Thanks for the comments. I'm all for listening to customer and customers providing feedback as you've probably seen from some of my own rants on various companies.

My issue/observation is more toward how that feedback is being presented and in what context.

The world is changing and how feedback happens will likely change as well.

[billm]

When I think of burn rate, I think of figuring out how much cash is going out the door per month and how long what is left (plus proposed investments) will last. You can change what that is called but ultimately that question needs to be answered.

The thesis can be great, you may know what it takes to get there, but if you go insolvent along the way you are done.

[Urgent Care Doc]

You are right that monthly "burn rate" actually is synonymous with startup monthly "investment capital," but when you are spending the money it truly can feel as though the capital is vaporizing into thin air. In fact, in helping entrepreneurs start urgent care centers, we find the failure is generally due to an inability to control the burn rate of the center. One picture that seems to help clarify the situation is this. Your available startup capital is the fuel to help you launch the "rocket" of your startup business. If you run out of fuel before you get into orbit, i.e., profitability, your business will crash and burn. So yes, it might feel insulting for someone to ask, "What is your burn rate." But the reality is that many startups are not good investments, they are really ways to burn up capital. The words, "burn rate, negative cash flow, or monthly investment," are really all synonymous. But no matter what you call it, when your startup runs out of cash, there is no more fuel to power the business and it will crash and burn.