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Thursday, October 30, 2008

Burn rate and cashflow analysis


I cannot remember how many times I have been looking at cash flow projections and P&L's, running the daily, weekly, monthly burn rate figures in my mind, and seeing the runway( I don't like the term, but is apt, if you run out off it you crash and burn) disappear, this post below gives you a method of gauging where you sit, on the survival matrix, in your own mind and your investors.


The Survival Matrix:




As Brad Stone and Claire Cain Miller talked about in the New York Times piece about startups slimming down to survive, we are seeing many companies looking at their cash balances and burn rates and deciding to cut burn to increase runway. We've done an exercise with our own portfolio that I wanted to share with all of you. I am calling it the survival matrix.
First we create a table of our entire portfolio and chart current cash balance, burn rate, and runway (cash/burn). We leave out the profitable companies from this analysis unless we think the downturn will cause them to start burning cash. Here's a look at a theoretical runway table:


We then do a scatter plot of burn rate versus runway with runway in months on the x-axis. It looks like this:





We then do a scatter plot of burn rate versus runway with runway in months on the x-axis. It looks like this:









When you do that, you'll get to four quadrants.
Where you want your company to be is in the upper right quadrant, which I call "the comfort zone". The comfort zone is a low burn rate combined with a long runway.
The upper left quadrant is not a bad place to be as well. I call that the "too small to fail" quadrant. While your runway is not long, your burn rate is so small that your investors can fund your company for a while without any new money showing up to join the party.
The lower right quadrant is also not a bad place to be. I call that the "betting on revenue" quadrant. These are the companies that are carrying high burn rates but also have long runways. They are betting on revenues to start coming in and lower their burn rates over time. One thing about this quadrant though, you don't stay here forever. Your runway will come down and you'll either go into one of the upper quadrants because your burn has come down, or you will go into the lower left quadrant.
The lower left quadrant is the "danger zone" - high burn combined with short runway. You don't want to be there.
We've done this analysis on our portfolio recently and we came away from the exercise feeling very good about where things stand. We'll keep doing this every couple months as one of several "macro screens" we do on our overall portfolio health.
If you are an entrepreneur, you should know where your company fits on the survival matrix and if you are a VC, then you probably are already doing this kind of analysis on your portfolio as well.
GW

1 comment:

Economist said...

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Cheers,
Matt