Burn Rate as the Canonical Mistake (for Web Startups)

One of the all time great opening lines is from Tolstoy’s Anna Karenina:

Happy families are all alike; every unhappy family is unhappy in its own way.

I am beginning to think that the opposite is true for (web) startups.  There seem to be surprisingly many roads to success.  But the canonical road to trouble appears to be taking your burn rate up *before* you have something that is really working.

Over the past couple of weeks I have seen two startups that are in very different positions, despite superficial similarities.  They both have fully launched services in interesting areas and with some traction but that have not yet really taken off.  They are both iterating on their services.  But one has spent $5 million already whereas the other has spent less than one tenth of that.

The mood between the two companies couldn’t be more different.  One is filled with excitement about a new twist on their service that they are pursuing at a current burn rate of less than $40K per month, which represents the highest it has been.  The other is struggling to make changes they know they need but their burn is still $100K per month, despite having come down significantly from where it has been.

Only time will tell whether the low burn rate company will succeed, but they have a great many more options available for themselves.  They could get acquired and have in fact had some offers (they do have some traction after all) and even a modest acquisition would pay back investors and leave something over for the founders.  They could raise just a bit more money and keep iterating for a long time.  Or if they happen to hit it right with their latest iteration they can quickly and cleanly raise a fair bit of money.

Nothing really new here in this post – this is after all the mantra of the lean startup movement – but it can’t be said often enough!  And this recent experience brought the contrast home so starkly that I felt compelled to write about it not just for others but as a reminder to myself.