Burn After Investing

Start Ups

Timothy B. Lee keeps an eye on the burn rate of startups:

This chart shows that young [software] startups are burning through cash at about the same rate they did four years ago: around $200,000 per month. But older startups today are burning through cash a lot faster than startups the same age were four years ago. The average startup in its fourth round of venture financing is now burning through $1.6 million per month, about three times the burn rate seen at startups in the same position in 2010. Pitchbook, the company that compiled the data, says that “the burn rate has increased for Series B and later rounds to the highest levels since the height of the tech bubble.”

Do these high burn rates mean that we’re on the verge of another 2000-style crisis?

It’s hard to say. It’s certainly possible that the high burn rates simply reflect a return to the irrational exuberance of the late 1990s. But it’s also possible that companies are spending more money because the markets these new companies are pursuing will be bigger and more lucrative than the ones companies were pursuing 15 years ago.

Relatedly, Ben Casselman flags data showing that entrepreneurship is still in the doldrums:

Last week, the Census Bureau released new data on so-called business dynamics (startups, failures, hirings and firings) for 2012. Entrepreneurship did rise in 2012, but barely. Americans started 410,000 businesses in 2012, up just 2 percent from a year earlier and still more than 20 percent below prerecession levels. The startup rate — the number of new businesses as a share of all businesses — was essentially flat at 8 percent.