Joseph Jayanth

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An investor’s perspective

February 15th, 2016

Categories: Learning | Product

I happened to bump into these tweets and I thought I’d put these together for the benefit of startups and entrepreneurs.

the tweets were from @avnish  – Entrepreneur (Baazee – now eBay India); Investor (Matrix Partners ); Family man and Global Citizen.

1/ Following up on my August 2015 on the correction in the venture environment. It’s now clearly playing out in full public view
2/ However, it doesn’t appear to have been fully internalized by entrepreneurs – zero base view of business building not yet in vogue
3/ Burn rates are still too high – million dollar monthly burn rates still de riguer and not shocking enough
4/ If one looks back in history, current environment is not an exception – the preceding 12-18 heady months were
5/ Companies raising 50, 100 million dollar rounds is not going to come back anytime soon; as poor capital intensity kills returns
6/ Admittedly the strategic investors leading these rounds now are here to stay – but even their shareholders will ask questions
7/ So companies should focus on building businesses the right way and take an axe to burn rates
8/ While no exact science – sharing some high level views on appropriate burn rates during business building by stage of Co.
9/ Seed stage – prior to clear PMF {product market fit} – keep peak burn to ~30L/mo at most so ~3-4cr seed gives ~18 mos. for MVP and some iterative early PMF
10/ Series A – to scale early PMF and build traction – one may double peak burn to ~70L/mo so ~2-3M$ Series A gives ~18-24 mos.
11/ Series B – to multiply traction and iterate business model – further double peak burn to ~1.5-2cr/mo so ~6-8M$ Series B gives ~18-24 mos
12/ Series C – to demonstrate scalable and sustainable business model – peak burn no more than 1M$/mo so ~15-20M$ Series gives ~18-24 mos.
13/ This stage is where things are craziest and unsustainable right now. Burn > net revenue = impending disaster
14/ Companies need to come out of the cash trough (reducing peak burn) and should be non-Marketing breakeven before they raise next round
15/ The above numbers are indicative than exact science – the round sizes above are what they should be; not what they have been recently
16/ Important that Founders focus on capital efficiency and raise money only when their companies are worth 10-25x of capital raised
17/ This thumb rule minimizes Founder dilution; increases investor returns – implies core biz building till it achieves such value
18/ Therefore forces Founders to align burn with stage of business until the business grows enough in value
19/ An easy funding environment with high valuations can give false signals on capital efficiency by meeting the rule sans biz progress
20/ That’s over. And not a minute too soon
21/ Some of our best companies – @Olacabs, @Quikr, @Practo, @DailyhuntApp, @stayzilla were all built in the above fashion in the early days
22/ And then the world went crazy – and we had to respond
23/ Its time to go back to first principles and basics. It’s a good thing.

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