Sam Altman, the president of seed accelerator Y Combinator, has a warning for startups.
In a tweetstorm on Wednesday, Altman, whose organization has funded startups including Airbnb and Dropbox, warns that startups need to keep their burn rates low.
Altman said that startups that burn through cash too quickly — even when things are going well for the company — can face problems.
"Founders would do well to remember that having an almost comically low burn in the early days work more often than the opposite," he said.
Altman says some young companies have burn rates as high as $150,000 per month. These startups seem to think their next round of financing will be easy to come by, but that may not be the case —especially if they don't have much traction.
Altman's warning to startups echoes that of another Silicon Valley investor. In an interview with the Wall Street Journal last fall, Benchmark partner Bill Gurley said that burn rates are the highest he's seen since 1999, and that startups are taking on an "unprecedented" level of risk because it's easy for startups to raise money.
Warning of a tech bubble mirroring that of the late 90s, he also says people are happily working at startups that may be losing millions of dollars a year because the industry is very optimistic.
Here's Altman's tweetstorm:
1) "keep your burn rate very low" is one of those unteachable lessons for early-stage startups
— Sam Altman (@sama) February 19, 2015
2) it ends up being especially bad for startups where either the founders need big salaries or are non-technical and need to hire right away
— Sam Altman (@sama) February 19, 2015
3) but every small increase in burn ramps up the company's willingness to spend in subtle ways
— Sam Altman (@sama) February 19, 2015
4) and seed money is so easy to raise in the current environment that founders assume they can just raise more money whenever they want
— Sam Altman (@sama) February 19, 2015
5) this meets cold reality when companies try to raise money again w/little traction and a $150k a month burn rate--often means death
— Sam Altman (@sama) February 19, 2015
6) founders seem to think "well we need money and the press loves us, so we'll be able to raise more for sure"
— Sam Altman (@sama) February 19, 2015
7) anyway, founders would do well to remember that having an almost comically low burn in the early days work more often than the opposite
— Sam Altman (@sama) February 19, 2015
8) while it's true that if everything is going amazing well a high burn rate won't hurt much, most startups go through a trough of sorrow
— Sam Altman (@sama) February 19, 2015
9) and that usually comes right at the wrong time--ie, right when you're running out of money
— Sam Altman (@sama) February 19, 2015Join the conversation about this story »
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