I spoke to a CFO this week and we were talking about his current business and their approach to managing Finance, which has always remained the same but was the antithesis of what so many software companies have done in recent years.
“How is burn rate even a thing” was one of the many pearls shared, they couldn’t believe that for the last few years “burn rate” was something which companies talked about so much, and in some instances, with a sense of pride they felt.
We also discussed the rounds of funding and how they had been labelled letters of the alphabet, why they asked, and what does it even mean? You raise money, you label it something, then you try to spend the money, often losing focus on what you needed investment for in the first place, spend it more wildly and then try to do it all again.
Now, I know the above isn’t a path trodden by everyone before the haters start coming for me 😊.
Anyway back to “burn rate” and my conversation with the CFO, having both come originally from non-tech backgrounds, we agreed that the basic concept of spending more than you produce income-wise was pretty flawed and yet it had become an accepted concept.
I’ve spoken to a lot of leaders in the last year who have worked in companies where a familiar story and outcome has happened, this is what they’ve seen.
- Companies need to invest in certain areas of their business to grow
- Companies receive investment from often VC or PE money
- They raise more than they expected
- Their plans change because they have more money, so they spend more money on a wider range of things
- The investor does nothing to dissuade the spending
- Focus changes from what was a laser-guided approach, to getting distracted by spending and investing in things that take you away from the primary objective
- Our old friend Burn Rate is now super high, the business has lost focus on what it actually needed the money for originally, so they’re spending more, not selling enough and then the investors start to put the squeeze on.
Ok, I accept there is more to it than this, a lot more to it in fact, and I’m not an investor or tech founder but the below article was only written last year around the “relative predictability” of investing in SaaS.
I wonder if they would write the same article now?
In this other article, they analyse in a lot more detail the relationship with investors and also dig into how many companies actually make it to $100m plus
“That 97% does not imply failure, many companies have great outcomes at far smaller revenues, especially if they have not raised too much capital.”
So I wonder in this new normality we now live in where money is no longer cheap and is certainly harder to secure, will we see terms like “burn rate” sent to the scrap heap?
I predict we will see a whole host of new terminology in the coming years in the tech world, and I look forward to discussing it with my CFO friend!