VCs Warn Start Ups to Reduce Their Burn Rate

Om Malik, one of the few uber-A-listers I haven’t met or hung out with yet, has a fantastic post about the economy, VC Funding and start ups. With the economy heading so completely south, start ups are starting to tighten their belts.

Heck, look at Jeremiah Owyang’s tally of the Social Media layoffs recently:

Oct 10: Fast Company, which has social network for website and popular videoblogger, lays off 20

Oct 10: Seesmic, a video conversation player lays off 7

Oct 6: eBay to lay off 10% of workforce to streamline after recession.

Oct 3: Gawker blog network lays off 19, and brags about it.

Om goes on to say that because of this meeting, Sequoia is telling its companies to put survival strategies in place and figure out ways to outlast the broader market troubles. (image source: GigaOm)

Sequoia isn’t the only one advising its startups to tighten their belts and prepare for a roller coaster ride. Ron Conway, a well-known angel investor in the Valley who has invested in companies like Google, offered very sobering advice to his companies via email earlier today. (from Om)

Raising capital will be much more difficult now. You should lower your “burn rate” to raise at least 3-6 months or more of funding via cost reductions, even if it means staff reductions and reduced marketing and G&A expenses. This is the equivalent to “raising an internal round” through cost reductions to buy you more time until you need to raise money again; hopefully when fund raising is more feasible.

Letting go of staff is hard and frequently sickening.  A re-evaluation of timelines and re-focus on milestones with an eye to doing more with less will allow you to live many more days, and the name of the game in this environment in some respects is survival — survival until conditions change. If you are in a funding cycle, you should raise your funding as soon as possible and raise as much as possible but face the fact that if you can’t raise money now you must cut costs. [source]