The Survival Matrix
As Brad Stone and Claire Cain Miller talked about in the New York Times piece about startups slimming down to survive, we are seeing many companies looking at their cash balances and burn rates and deciding to cut burn to increase runway. We’ve done an exercise with our own portfolio that I wanted to share with all of you. I am calling it the survival matrix.
First we create a table of our entire portfolio and chart current cash balance, burn rate, and runway (cash/burn). We leave out the profitable companies from this analysis unless we think the downturn will cause them to start burning cash. Here’s a look at a theoretical runway table:
We then do a scatter plot of burn rate versus runway with runway in months on the x-axis. It looks like this:
My excel graphing skills are lacking so this chart doesn’t look exactly the way I want it to. I’d prefer that the x-axis numbers be at the bottom, not the top of the chart. And there should be four quadrants made via lines that run at a $200,000/month burn rate and at the 18 month line (those are subjective numbers, each fund would have their own views on where those lines go).
Thanks to Danny Moon, this chart now looks exactly the way I wanted it too. This blog post is now peer produced!
When you do that, you’ll get to four quadrants.
Where you want your company to be is in the upper right quadrant, which I call "the comfort zone". The comfort zone is a low burn rate combined with a long runway.
The upper left quadrant is not a bad place to be as well. I call that the "too small to fail" quadrant. While your runway is not long, your burn rate is so small that your investors can fund your company for a while without any new money showing up to join the party.
The lower right quadrant is also not a bad place to be. I call that the "betting on revenue" quadrant. These are the companies that are carrying high burn rates but also have long runways. They are betting on revenues to start coming in and lower their burn rates over time. One thing about this quadrant though, you don’t stay here forever. Your runway will come down and you’ll either go into one of the upper quadrants because your burn has come down, or you will go into the lower left quadrant.
The lower left quadrant is the "danger zone" – high burn combined with short runway. You don’t want to be there.
We’ve done this analysis on our portfolio recently and we came away from the exercise feeling very good about where things stand. We’ll keep doing this every couple months as one of several "macro screens" we do on our overall portfolio health.
If you are an entrepreneur, you should know where your company fits on the survival matrix and if you are a VC, then you probably are already doing this kind of analysis on your portfolio as well.
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Comments (Archived):
Phew, we’re top right!Do the fictional burn rates actual mirror reality in any way? Specifically, do you have such a variance in burn rates (25K-750K) and can you share your median burn rate and runway? Understand if you can’t for competitive reasons, but as an entrepreneur, it would be interesting to see those stats.
I made them up. They have no basis in reality. But we do have companies in our portfolio with 25k burns and also 600k burns. Thankfully the cash balances are roughly proportionate
Fred,To make the format changes you want, you can just format each axis. Right click on the y-axis, go to Format Axis, check the “Values in Reverse Order” box to change the order to get the x-axis numbers at the bottom. Then enter -200,000 in the “Value (X) axis crosses at:” box. Then right click on the x-axis, Format Axis and enter 18 in the “Value (Y) axis crosses at:” box.Might be a more elegant way to do this, but this should work.
I never disagree with you Fred, but why not cut the burn rate to zero? then you have an infinite runway, right?The entire purpose of building a company is to grow it, and that’s why VCs invest. So, you ought to have people working for you that help you grow, to get somewhere. REGARDLESS of the state of the economy. In other words, why was it okay for lunkheads lauded by the tech blogs to hire dozens of people they didn’t need 18 months ago, but not okay for them to hire them today?If someone is adding real value to your team, helping you grow share and get where you’re going, then hire them. If they don’t, then don’t.The current “lay people off” craze ought to be replaced with a long term “hire good people you can afford” mantra, I think.Squidoo hasn’t laid anyone off, and we’re really proud of that.
I think by burn rate he means total expenditures. Presumably you can’t cut that to zero and still be in business.As to why hire so many people, though I generally disagree with it the theory is land grab. Get there before your opponent does. Personally I think Facebook’s success, despite coming to the party well after MySpace shows that is overrated. Same with Google/Yahoo, YouTube/Google Video. All of those became competitive with or totally conquered much better-funded rivals who were there first, even with a network effect.
Burn rate is your net cash withdrawal from working capital. If you have revenue in excess of spending then your burn rate is zero because you are not making withdrawals. Seth is suggesting that these startups focus on more revenue now instead of planning to raise another round to stay alive.
Ha, you know, nowadays that notion hadn’t even occurred to me 🙂
very few of our portfolio companies have reduced headcounts either seth. i am not saying that they should. i am just saying that companies with high burns and short runways are in the danger zone. we have a bunch of companies in our portfolio in the “betting on revenue” quadrant that have not cut their burn rates. they are investing their cash balances in sales and marketing and product. and i am sure that some of them, hopefully all of them, will make those investments pay off
Betting on revenue is a very tough place to be. I would argue in this economy that the odds of this bet have dramatically increased. What happens if revenue does not materialize? In 1987 after the market crash, the damage happened in slow motion. By 1989 people were walking away from homes in Connecticut, I know because I bough a house whose price was cut in half between 1988 and 1989. The damage from this market drop will take years to be fully evident. This in my opinion is much deeper. Revenue will not materialize, assumptions should be reexamined. This time is no different.
I agree. Cutting costs is a tactic, not a strategy. When you find yourself in a whole the first thing you want to do is stop digging. But you still need to find a way to get out of the whole. The key point that you’re making is, “ensure you have enough runway to figure that strategy out.”
Hi SethYes, it does seem that careful planning and frugality have only recently come back into vogue out in Silicon Valley.Boom times or bust, every startup should have a simple, huge, boldly lettered sign on the wall (or tattooed on the CEO’s forehead): Live to fight another day.As always, common sense is a trade secret.
@Seth you have two issues to get to zero burn rate:(i) Pre revenue companies have zero inflow, so can only have zero burn rate with zero outgoings – in effect they need to hibernate, and that implies they can no longer Carpe the Diem :)(ii) Even those with revenue often cannot function and simultaneously build a business with the staff they can afford at zero burn.But take your point – there is an interesting game theory here, in that if all other VC’s are losing their heads, this is perhaps the time to give your startup its head – get that industry giant position sorted now, it’ll never be cheaper to do.@ Fred – is the 18 month runway the current “best guess” for time in the tunnel then?
We’re upper left, our expenditures are still really low, our cash on hand is OK, and we’re starting to get some revenue traction (in unexpected places) which gets us towards cash flow neutral.The thing that boggle my mind about some of these layoffs is how big some of these companies are in terms of headcount. Seesmic laid off 30%, and that was 7 people. Seesmic had more than 20 headcount? Doing what?If you stay lean in good times, bad times hurt much less.
Very interesting to see this made explicit in terms of setting priorities from a point of view of VCs.As a heuristic for follow-on financing, it could also take into account capital deployed (size of circles?), as sunk costs are a definite worry in the “middling third” of a fund. Gotta recoup some of that cash and incremental multiples might actually be attractive.
This is a nice point re: capital deployed to date. Fred’s chart works very well and I agree in whole with the various quadrants. I imagine many of his portfolio companies (and other web 2.0) are “lucky” in that they can turn on and off variable costs fairly easily. The worst situation right now may be for capital intensive businesses (think large inventory or CapEx component) that were approaching nice run rates and maturity in their life cycles (perhaps only a “quarter away from breakeven”) who are now suffering from a general slowdown in the economy. When you have tired investors around the table, they may be unwilling to put yet another round together. Which leads to the inevitable attempt to go after Plan B, which may be to try and sell the company to recoup a bit of the investment. Of course, that may have seemed like a plausible idea as a backup 6-12 months ago. Not as much now.
Fred,Thanks to four years in finance, I quickly created the survival matrix with the improvements you wanted. Here’s a link to the image: http://farm4.static.flickr….
thanks but i really like keeping “the comfort zone” on the upper right. this version works better for mehttp://twitpic.com/ifmk
what is this crisis/correction/loomingRecession? an evolving learning system. and here is an instance of what any decent system does to learn. yes we should have all had these matrices since … the days in which excel was still intuitive. but with so many dynamic inputs, crazes (financial derivatives, widget mania) displacing pre-conceived notions at any given time it’s impossible to consistently have the “right priorities” over any short term.so you can either be a consistent, conservative, coot – and look small in good times. or constantly adapt after the fact – and look like a presidential candidate. either way you win – and lose. and the more learned system evolves towards a more complex “crisis”
Survival seems such a negative word 🙂 Just wrote some ideas, why startups should take the recession on a positive note: http://kaljundi.com/2008/10… – more optimism please 🙂
I think this is also a good chart for an individual company not just a portfolio. You can chart this monthly and see which way the company is moving.This works even if you are bootstrapping because you’ll go through cycles, even when you’re bootstrapping you go into burn rate the scales just change.
Mr. Wilson – Just curious… how did you decide to place the nexus for your quadrants (@ $-200K and 17.5 mos of runway)? Suspecting this is an aribtrary placement as what might be considered Comfort quad for some is different from fund to fund (or, for that matter company to company).
As I said, it depends on the fund$200k x 18 months is $3.6mm which is the most that our fund could possiblyfund ourselves if we had to do that to keep a promising company alive forthe next year and a halfFrankly 18 months might not be enough but that’s the longest horizon I canthink about in the VC businessHope that helps
Great analysis for segmenting companiesThis is a static view of any situation of a company.In business choices have to be made where to invest in:- Increase marketing spending for more lead generation- Decrease marketing spending using other channels – Increase sales force for closing more deals- Decrease in sales force in order ot survive or become an OEM supplier- Develop new products- Discontinue existing products for less support costsInvestors look for future revenues and earnings, not the current situation, and that is what drives entrepreneurs too.
Thought you might find this interesting.
NiviI think the matrix works in good times and in bad but is particularly useful when financing is hard to come by.A layoff is a layoff in my book. I hate to see them happen whether its one employee or thousands. I don’t think there are any metrics that make sense in the abstract