Concerns about high burn rates among tech startups are not new; they did not spring into being suddenly in the fourth quarter of 2021, the final three-month period of the most recent startup boom.
If you rewind the clock to 2014, investors were worried about tech startups losing too much money. Comments from Bill Gurley and Marc Andreessen from the period could be shared on Twitter today, and you probably wouldn’t notice that they are nearly a decade old.
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Did the startup market listen to the 2014 venture warnings concerning high burn rates and the potential, to summarize the a16z co-founder, for startups losing too much money to vaporize? Maybe a little, but I doubt that anyone views the 2014-2019 era as conservative when it came to startup spending.
Then COVID hit, and even more money flowed into venture funds, bolstering startup fundraising to record highs. Startups with newly minted 10-figure valuations snacked on nine-figure rounds and plowed through the capital quickly, sure in the knowledge that there would be another check waiting.
For a while, this proved true. Then, in the final months of 2021, the music stopped. Suddenly, huge venture rounds were in retreat, burn rates were once again bad words, and everyone wanted to conserve cash. You know what came next: layoffs and an utter halt to the IPO market.
With capital expensive and the economy slowing, the question was what richly valued startups with towering cost structures would do to avoid harming revenue accretion while also finding savings. The first answer was to collect what cash was possible and then wait. Extension rounds became the topic du jour. That was a fun summer.
Every startup wants an extension round, but there aren’t enough to go around
Now that we are well into 2023 and seeing huge rounds continue to decline in frequency, you might wonder when the reality of sticky burn rates and a difficult fundraising environment will bite. Surely unicorns were racing toward a moment when their dwindling cash balance would force a reckoning in the form of a shuttering, fire sale or painful recapitalization at egregious terms.
Maybe not. Recent data from SVB indicates that quite a lot of unicorns still have plenty of runway. Not as much, mind, as they did, but the data isn’t as terrifying as we expected.
Collecting data points from recent SVB reports on fintech startups (2022), consumer internet startups (2023) and the state of the markets in the first half of 2023 yielded the following:
- The median cash runway for U.S. fintech startups with $50 million or more in revenue — a loose cognate for fintech unicorns — was 14 months at the end of Q3 2022. The data point implies that those companies still have quarters of cash in hand today, giving them some space yet to sort out their next capital tranche.
- The median cash runway for U.S. consumer internet startups at the end of Q4 2022 was 11.4 months, meaning that half of these companies had more than a year of runway. This again implies that there is some wiggle room for many U.S. consumer internet companies — unicorns included — to find more capital.
- Finally, startups with $25 million to $50 million in revenue that raised in 2022, per the SVB H1 2023 report, had a median cash balance of 21 months. In simpler terms, unicorns that raised last year are sitting somewhat pretty.
The news is not all good:
- The median cash runway for U.S. fintech startups with $50 million or more in revenue was 40 months back in Q4 2020, massively ahead of the 14 months we saw at the end of Q3 2022.
- The median cash runway for consumer internet startups reached a high of 15.9 months back in Q3 2020 and has declined regularly since then.
- Startups with $10 million to $25 million worth of revenue that raised in 2022 have a median of 13 months of runway, far less than their larger peers.
These datasets don’t give us good insight into the state of enterprise SaaS, a massive startup category. But I don’t think that such startups are those most in danger of implosion; their revenues tend to be pretty durable and high-margin, and they may have an easier path to M&A than consumer-facing companies or startups in the incredibly competitive fintech market.
In between the numbers, it is possible to spot trouble: If the median runway for unicorn-ish fintech startups in the United States was 14 months back in Q3 2022, half of those companies had less than that figure, and it’s been around five months since. There must be some startups in that cohort that are frantically cutting costs to buy themselves a bit more time.
All told, however, the data just isn’t as bad as I expected. Are startups in the clear? No. I asked GGV’s Jeff Richards about the 14-month figure in question, noting that it didn’t seem devastating. He said that in a hot market, the figure was “not bad,” but that in today’s market, it could prove “challenging.”
How so? SVB’s managing director for early-stage startups, Andrew Oddo, added to the conversation, noting that the time between venture rounds is greatly expanding. The SVB H1 report notes, to pick one salient example, that the time between Series C and D rounds — prime unicorn territory — expanded from 16.4 months back in Q1 2021 to 20.9 months by the end of 2022.
Less runway and longer raise cycles? Throw in smaller venture rounds more generally, and it’s clear that unicorns are grazing thin pasture. It just doesn’t seem that we’re about to watch a few hundred unicorns lemming themselves over a cliff.
Not yet, at least.
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