Getting Burn Rates in Line with Reality, Not the Letter Name of the Last Round

Burn rates should be tied to product-market fit, not the letter name of the last round you raised.

We’ve spent a good chunk of the last 18 months helping our existing and prospective portfolio companies align their burn rates with where they are on the product-market fit journey and how much time they need to answer the key open questions about their respective businesses. This was a lot of work, but it was work that needed to be done.

Many of these conversations have been straightforward, but one particular flavor of these conversations has been challenging. I’ve been in some conversations where there is a significant gap between the investor's perception of the right burn rate and the company’s perspective on what they need to spend to achieve the next set of milestones. The root of this disagreement, in many cases, comes from two different reference points. Investors are often looking at where the company is in terms of finding product-market fit, what similar companies in the portfolio are spending per month, and what they think the company needs to achieve in order to hit its milestones. Founders rarely have access to this information; I find that many founders benchmark their burn rates on what other companies that have raised similar letter-name rounds (Seed, Series A, etc.) are spending. Those two things no longer line up well.

I saw this tweet from Samir Kaji, and it really struck me as a great encapsulation of what I’m seeing today:

During the good times, many companies were able to raise milestone letter-name rounds (Seed, Series A, or Series B) without the traditional levels of product-market fit that they needed in the past. Many companies increased burn rates and spending to be in line with what other companies that had raised that letter round were spending. The problem is that a Series A company that has product-market fit, is generating revenue, and growing is very different from a company that raised a Series A or B on a narrative of future revenue and customer traction. Those two companies should think really differently about the appropriate level of spend per month, and the right burn rate for each is likely very different.

The proper reference point for burn rate is progress, not the name of the last letter round you raised. Capital is an incredibly valuable and scarce commodity today, so spend it wisely.