Are VC Investors Prepared to Manage Public Company Scale in Private Markets?

In an interview yesterday, venture capitalist Bill Gurley of Benchmark spoke out about startup burn rates, particularly in later stage companies, saying:

“I think that Silicon Valley as a whole, or that the venture-capital community or startup community, is taking on an excessive amount of risk right now — unprecedented since ‘99”

On one hand, I love this interview because it is so rare to read thoughtful criticism of the industry from one of its respected insiders. On the other hand, I think it encourages the exact risk-averse behavoir that it is criticizing — leading investors to shun high risk earlier stage deals and instead stockpiling their bets into later stage companies that would normally be publicly held. What else are these companies to do but spend it?

It’s Not About Burn, It’s About Revenue vs. Expenses

As an early stage founder whose company is burning $150–200K month I found it hard to get my head around companies who are spending 20X this amount at $4M per month in burn (to be clear: burn is the amount of money your bank account goes down each month, after revenue).

If their ratio of revenue to expenses is anything like mine, they must be making $8–12M of revenue per month, and spending $12 — 16M. These numbers sound crazy!

There must be some kind of precedent for spending this way, some way to justify the decision to run these businesses at a significant loss even at massive scale. Back in May, I wrote a detailed overview comparing tech IPOs of today to those of the first Dot Com, which was the culmination of more than 100 hours of research reading every single S-1 in excruciating detail.

This analysis looks at the ratio of revenue to expenses, and describes how close to profitability they were.

As you can see, about half of the companies in this group were profitable, and the remainder are in the 75–95% range.

A much more detailed spreadsheet including including ratios for all IPOs 1998 to present can be found at the bottom of this post.

Public Company Scale in the Private Market

Uber, which is valued at $17 Billion, reportedly generated $750M in gross revenue with $150M in cash flow and one leaked report says they are pulling $20M per week. If you’re making $80M per month but spending $84M ($4M burn) that’s really not that crazy at all. That would be a 95% on the graph above. They could burn $20M per month and still be at 80%.

This might be the best argument for Uber, and other high burn startups with meaningful cash flow, to go public. The public markets seem to be much more accepting of this kind of spending for growth than venture capitalists.

Most venture capital investors divest of their holdings once their companies go public and pay distributions back to their LPs, so maybe these “high burn” companies — who are operating at the scale of public companies without actually being public — are simply out of many private market focused investor’s realm of operational expertise and risk tolerance.

Now I understand why a company like Uber invites firms like Fidelity, BlackRock, and Goldman Sachs to the table.

That’s a high quality problem to have.