VCs to Startups: Cut Your Burn Rate by 25 % Now!
I'm hearing VCs telling portfolio companies to cut their spending significantly, by at least 25 per cent, because of the financial crisis and its impact on the economy.
The goal is to extend a startup's "runway" its time between financing events. Most of those cuts will come from payroll by eliminating jobs and in cutting outside services such as marketing and PR.
"I wouldn't want to be in the position of raising money for a startup venture right now," said Gregg Brockway, a serial entrepreneur and President of Tripit, a startup based in San Francisco. Mr Brockway said Tripit is well financed and doesn't need to raise money. "We raised $6m and we still have most of it in the bank."
Om Malik at GigaOm yesterday reported that Sequoia, one of Silicon Valley's leading VC firm, held a meeting Tuesday with its portfolio companies.
. . . The gathering was addressed by at least four speakers, including a brief introduction by Mike Moritiz. Doug Leone was another speaker. I am still trying to nail down more details of the two other speakers. A person who handles Sequoia’s public market investments is said to have talked to the startups. The message delivered to those in attendance was that things could get a lot worse than people think, and it will be a more protracted downturn.
. . . They want the companies to cut costs, to figure out way to survive and emerge at the other end of this downturn, which could last years. The speakers went through each functional area of the business and told the companies how to cut costs. By holding this special meeting, Sequoia is telling its companies to put survival strategies in place and figure out ways to outlast the broader market troubles.
. . . Sequoia isn’t the only one advising its startups to tighten their fiscal belts and prepare for a gut-wrenching ride. Ron Conway, a well-known angel investor in the Valley who has invested in companies like Google, offered very sobering advice to his companies via an email earlier today.
Raising capital will be much more difficult now. You should lower your “burn rate” to raise at least 3-6 months or more of funding via cost reductions, even if it means staff reductions and reduced marketing and G&A expenses. This is the equivalent to “raising an internal round” through cost reductions to buy you more time until you need to raise money again; hopefully when fund raising is more feasible.
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