Another venture capitalist is warning that startups are burning too much money.
Fred Wilson of Union Square Ventures says burn rates are “sky high all over the US startup sector right now.” The burn rate is the amount of money the company is losing.
Wilson was following the comments of Bill Gurley, a partner at venture firm Benchmark, who said, “I think that Silicon Valley as a whole or that the venture-capital community or startup community is taking on an excessive amount of risk right now.”
Gurley believes startups are burning more cash today than at any other point since 1999. He thinks too many people are working at companies that are losing millions of dollars.
For now, startups are having relatively little trouble raising new money, so they just keep burning through cash. They know there is more coming in the next round. But, at some point the money is going to dry up. We’re going to hit a wall, and then the companies will have to figure out how to take down their burn rate, or they will go out of business.
Gurley and Wilson are two of the smartest, most successful, and most vocal investors in tech companies out there. Wilson has invested in Twitter, Zynga, Tumblr, and many others. Gurley invested in OpenTable, Zillow, and Uber, to name a few.
Wilson says, “We have multiple portfolio companies burning multiple millions of dollars a month. Thankfully its not our entire portfolio. But it is more than I’d like and more than I’m personally comfortable with.”
He also says, “I’ve been grumpy for months, possibly for longer than that, about this … At some point you have to build a real business, generate real profits, sustain the company without the largess of investor’s capital, and start producing value the old fashioned way. We have a number of companies in our portfolio that do that. And I love them for it. I wish we had more.”
Wilson has thought that the current environment is risky for a while now. In 2010, for instance, he warned of storm clouds. In March, he wrote about how how zero per cent interest rates were fueling growth in the startup world.