Back when Silicon Valley Bank was still pitching a package of financial moves to its customers, it noted in a presentation to its own investors that “elevated client cash burn” was “pressuring [its] balance of fund flows.”
The previously central bank to Silicon Valley told the stock market that while it had anticipated a “modest, progressive” decline in startup cash consumption as venture dollars slowed, burn had “not moderated” in the first quarter of 2023. This hurt its deposit base, which in turn was a precipitating factor in the run that later smashed the bank.
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Reading through the bank’s notes before it failed a few dozen hours later, this column pulled out the burn statistic as the most interesting nugget from SVB’s asset sale and debt shakeup. Whoops.
Regardless of our inability to note an incipient bank run, the dataset formed an interesting conclusion in our minds: Startups were failing, at least in the United States, to truly reduce their burn rates.
New data paints a slightly more nuanced picture. Thanks to Brex data shared with SaaSletter, we can get a bit more granular. It turns out that when you compare later-stage startup spending cuts with their earlier peers, the bigger startups are doing a better job.
The question, then, is whether that makes sense. Let’s explore.
Cut spend, cut burn
Recall that in the first quarter we saw late-stage round sizes and valuations fall sharply. Capital flowing into larger, more richly valued startups is in retreat, and unicorns are currently wedged between a rock (falling venture capital investment), a hard place (a completely dead IPO market and slow M&A activity for companies of their size) and a rocky hard place (the fact that many late-stage startups are carrying paper valuations that will not convert into new investment at par).
In contrast, CB Insights data indicates that early-stage rounds are globally more stable in size terms. So, the cash crunch is likely weighted toward later-stage startups more than their smaller peers. (PitchBook data shows that the ratio of capital required versus invested is worse for later-stage startups than those that are more early in their business journey, to add weight to the point.)
That in mind, the following SaaSletter chart seems somewhat reasonable:
In a somewhat twisted sense, with capital harder to raise at the later stages of startup life, it is worth more than early-stage capital; more conservation efforts simply make good sense among the more mature startup set.
More importantly, our initial read of the SVB data was too broad. Sure, startups generally are not becoming profitable powerhouses overnight, but to say in general that burn rates are stickier than anticipated is insufficient.
You can read the above chart as the inverse of founder optimism when it comes to fundraising. The more optimistic founders are regarding valuation and capital availability, the more they are willing to spend today. The less optimistic, the less they are willing to spend. So, we can infer that Series C and D startup founders are more pessimistic than Series B founders, who are in turn less confident than Series A founders. And seed and pre-seed founders are apparently just chilling.
Good on them.
Spinning this around one more time, you could argue that the chart is in at least one sense better news for late-stage startups than their younger peers. That’s because later-stage startups have managed an actual reduction in spend; smaller startups, if they are trying, are failing to enact any real cost cuts.
This could imply that later-stage startups are more nimble when it comes to spend shift, meaning that they can perhaps react more quickly to market expectations.
Is it somewhat odd to claim that bigger companies are more nimble than their smaller peers? Of course. But bigger startups have something that smaller startups don’t: namely, regular and recurring marketing budgets. Those can get slashed to zero pretty quickly, unlike, say, the costs of staff. So later-stage startups likely have the option to cut spend by trashing a few line items while leaving their engineering, product and sales teams intact.
That fact doesn’t mean that our comments on rising pessimism on a per-stage basis are wrong; it just means that the pessimists are able to act on their vibes. And cut, cut, cut.
A 27% reduction in spend does not necessarily translate to a 27% improvement in a startup’s burn timeline. But with investors already shifting their preferences back to growth, the later-stage startups might just be able to stretch their cash until valuations rebound a hair. That, mixed with an improved income statement, could, just maybe, help some Series C+ startups raise again and make it through the downturn.
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