This week, startup Zirtual abruptly ceased operations and laid off 400 people via e-mail. CEO Maren Kate Donovan cited “burn” as the reason for the shut down — the difference between what it was bringing in and what it was spending.
She said the company was burning $400,000 a month, “which in San Francisco terms is nothing.”
She’s not wrong. Venture capitalists pour millions into young startups and expect them to grow rapidly. This means profitability isn’t expected — or even encouraged in the first few years. But it’s still a CEO’s role to closely monitor the company’s cash flow.
“The most important thing for a CEO to know is ‘when am I going to run out of cash at the current burn rate?'” said Jonathan Lehr, a managing director at enterprise VC firm Work-Bench. “You can’t just say, ‘burn happened.'”
According to Danielle Morrill, co-founder of Mattermark, one way to prevent such a flameout is to be more transparent about financials.
That’s why Mattermark published a breakdown of exactly how it’s spending its money each month. And it’s encouraging other startups to do the same.
The two-year-old company said it spent $713,000 in June. The majority went toward headcount ($525,000), with the second biggest expense being its San Francisco-based office ($45,000).
It only made enough to cover $293,000. The company, which Morrill says is “like a Bloomberg terminal for private investors,” has 450 customers who pay for access to its data and analysis.
The rest of the money comes from investors. Mattermark has raised $11.5 million in funding — its most recent round of $6.5 million was led by Brad Feld of Foundry Group.
Mattermark said its burn rate in June was $426,000, similar to that of Zirtual.
That’s not necessarily a bad sign, according to Lehr, who previously evaluated tech startups for Morgan Stanley’s IT department.
“That’s the purpose of VC funding, to fuel that hyper growth. There’s no one-size-fits-all answer,” he said.
How do Mattermark’s numbers stack up? Morrill said she’d love to know.
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