Raise more than you need - IPOs raise 5.3 years worth of historical burn

Many companies take a concerning approach to raising a Series A: they’re only raising 12 to 18 months of cash based on historical monthly burn (in other words, if they burned $100k last month, they’re raising $1.2mm to $1.8mm).  In our view and experience, this is way too light.  We’d recommend raising no less than 24 months of cash and up to 36 months if available (based on historical cash burn).  Why? A few reasons:

 

-Your model is too optimistic.  Almost every company we meet doesn’t hit projections, no matter how conservative they say they are.  As such, the number of months of cash raised should be based on historical burn.  If your projected burn is higher than historical, then multiply your projected by 1.5x to be safe and raise at least 24 months based on that burn.   

 

-It takes 12+ months of solid growth to justify an up round.  If you’re going to raise money at a higher valuation in the future, you need at least 12 months of consistent YOY growth to earn that higher valuation.  If you assume it takes 4 to 6 months to raise money, that means at a bare minimum, you need 18 months of runway: 12 months to show that wonderful YOY growth and then 6 more months to raise based on the past 12 months of growth.   The problem with raising 18 months though is that it assumes perfection: you make no errant hires, the dev team delivers product on time, competition doesn’t change much, etc.  In order to account for imperfection, we recommend adding another 6 months of burn bringing you to a grand total of 24 months (at least). 

 

-Raising money is a beat down.  Another factor to consider in raising more money: fundraising is distracting.   It’s like having a second job that adds no value to your real job (running your company), so you should make it a point to have the fundraising job as infrequently as possible. 

 

-The big boys are raising 5 years worth of burn.  We did an analysis of 83 tech IPOs, looking at the amount raised relative to their free cash flow.  Of the 47 companies that were burning cash in the year leading up to their IPO, on median they raised 5.3 years of cash.  This analysis is imperfect as not all of the money of an IPO goes to a company, but we do believe it’s a good data point that justifies raising more cash instead of less – if the big boys are raising a few years of cash, why aren’t you?  Do you know something they don’t? Probably not, especially since they’ve got the experience of raising prior rounds before the IPO, missing projections at some point, etc.  The data is below. 

 

 

    IPO/S1 Free Cash Flow Free Cash Flow   Raise/
Company (IPO Date) Ticker Year Burn Before IPO Year Burn in IPO Year Offer Amount Burn
Social            
Facebook  FB 2012 $405,000,000 $943,000,000 $16,080,000,000 ---
Linkedin  LNKD 2011 -$10,425,000 $8,081,000 $352,000,000 ---
Twitter  TWTR 2013 -$82,143,000 -$78,534,000 $1,820,000,000 23.2x
Snapchat  SNAP 2017 -$325,827,000 -$677,686,000 $3,400,000,000 5.0x
             
Marketplaces            
Priceline  PCLN 1999 -$2,092,598 -$47,489,493 $115,000,000 2.4x
eBay  EBAY 1998 $88,000 $109,000 $63,000,000 ---
Sabre  SABR 2014 $101,373,000 $283,240,000 $627,200,000 ---
Shutterstock  SSTK 2012 $27,610,000 $36,105,000 $115,000,000 ---
Etsy  ETSY 2015 $8,780,000 $10,783,000 $287,000,000 ---
Lending Club  LC 2014 -$11,469,000 -$9,296,000 $865,500,000 93.1x
Angie's List  ANGI 2011 -$5,755,000 -$11,708,000 $114,314,304 9.8x
Zillow  Z 2011 -$7,839,000 -$2,638,000 $69,240,000 26.2x
Groupon  GRPN 2011 $7,220,000 $72,204,000 $700,000,000 ---
GrubHub  GRUB 2014 $29,574,583 $36,390,000 $200,000,000 ---
Care.com  CRCM 2014 -$10,082,000 -$40,643,000 $90,950,000 2.2x
Match Group  MTCH 2015 $122,845,000 $37,771,000 $400,000,000 ---
Expedia  EXPE 2005 -$30,107,000 -$18,019,000 $72,800,000 4.0x
             
Content Distributors            
Yelp  YELP 2012 -$2,210,000 -$12,611,000 $107,250,000 8.5x
TrueCar  TRUE 2014 -$38,918,000 -$12,315,000 $69,975,000 5.7x
Netflix  NFLX 1999 -$7,697,000 -$29,690,000 $82,500,000 2.8x
Pandora  P 2010 -$15,318,000 -$29,366,000 $235,000,000 8.0x
Google  GOOGL 2003 $118,067 $218,645,000 $1,666,429,420 ---
             
Gaming            
Zynga  ZNGA 2010 $151,046,000 $206,218,000 $1,000,000,000 ---
             
Hardware            
Fitbit  FIT 2014 $25,647,000 -$7,721,000 $731,500,000 94.7x
GoPro  GPRO 2013 -$9,429,000 $84,152,000 $427,200,000 ---
Garmin Ltd  GRMN 1999 $28,268,000 $12,147,000 $147,000,000 ---
             
SaaS            
Box Inc  BOX 2013 -$5,913,000 -$101,312,000 $175,000,000 1.7x
Hubspot  HUBS 2013 -$8,390,000 -$27,788,000 $114,000,000 4.1x
Marketo  MKTO 2012 -$17,660,000 -$28,202,000 $78,700,000 2.8x
Netsuite  N 2006 -$24,301,000 $418,000 $160,000,000 ---
SalesForce  CRM 2003 -$13,879,000 $2,846,000 $110,000,000 ---
Wix.com  WIX 2012 -$12,346,000 -$4,553,000 $127,000,000 27.9x
WorkDay  WDAY 2012   -$18,773,000 $637,000,000 33.9x
Zendesk  ZEN 2013 -$8,678,000 -$3,111,000 $100,000,000 32.1x
Atlassian  TEAM 2015 $65,021,000 $65,545,000 $462,000,000 ---
Shopify  SHOP 2015 -$3,108,000 -$23,501,000 $131,000,000 5.6x
Xactly  XTLY 2015 -$6,721,000 -$14,503,000 $56,000,000 3.9x
MindBody  MB 2014 -$13,603,000 -$25,239,000 $101,000,000 4.0x
Appfolio  APPF 2014 -$8,058,000 -$6,001,000 $74,000,000 12.3x
Splunk  SPLK 2011 $538,000 $6,908,000 $229,500,000 ---
ServiceNow  NOW 2011 -$9,116,000 $28,735,000 $209,700,000 ---
BazaarVoice  BV 2011 -$1,628,000 -$2,929,000 $114,000,000 38.9x
HortonWorks  HDP 2013 -$1,330,000 -$33,105,000 $100,000,000 3.0x
2U  TWOU 2013 -$25,038,000 -$23,262,000 $119,300,000 5.1x
Acacia  ACTG 2014 -$3,982,000 $6,931,000 $103,500,000 ---
Athenahealth, Inc.  ATHN 2006 -$8,978,049 -$7,294,267 $113,000,000 15.5x
Benefitfocus, Inc.  BNFT 2012 -$1,599,000 $4,314,000 $70,600,000 ---
BroadSoft, Inc.  BSFT 2010 -$12,694,000 $9,658,000 $67,500,000 ---
Castlight Health  CSLT 2013 -$29,783,000 -$52,651,000 $178,000,000 3.4x
Cornerstone  CSOD 2010 -$3,232,000 -$2,732,000 $136,500,000 50.0x
Cvent, Inc.  CVT 2012 $9,214,000 $15,463,000 $117,600,000 ---
Demandware  DWRE 2011 -$93,000 -$2,737,000 $88,000,000 32.2x
Five9, Inc.  FIVN 2013 -$10,981,000 -$21,513,000 $70,000,000 3.3x
Instructure  INST 2014 -$9,638,000 -$22,841,000 $80,960,000 3.5x
Intralinks  IL 2009 $8,262,000 $8,588,000 $143,000,000 ---
Jive Software, Inc.  JIVE 2010 $693,000 -$14,161,000 $161,000,000 11.4x
Lifelock  LOCK 2012 $10,588,000 $21,019,000 $141,300,000 ---
LivePerson Inc.  LPSN 1998 $42,000 $19,000 $32,000,000 ---
LogMeIN, Inc.  LOGM 2008 $1,706,372 $6,817,926 $106,700,000 ---
Marin Software  MRIN 2011 -$12,657,000 -$19,850,000 $105,000,000 5.3x
Medidata Solutions  MDSO 2008 $3,914,000 $5,085,000 $88,200,000 ---
MobileIron, Inc.  MOBL 2013 -$25,816,000 -$27,824,000 $100,000,000 3.6x
Nant Health  NH 2013 -$53,772,000 -$88,994,000 $90,000,000 1.0x
New Relic, Inc.  NEWR 2014 -$15,771,000 -$36,939,000 $115,000,000 3.1x
Proofpoint, Inc.  PFPT 2010 -$6,199,000 -$16,000 $82,000,000 5125.0x
Qualys, Inc.  QLYS 2011 $8,386,000 $9,691,000 $91,000,000 ---
RealPage, Inc  RP 2009 -$2,301,000 $15,249,000 $180,000,000 ---
RingCentral, Inc.  RNG 2012 -$7,443,000 -$25,187,000 $97,500,000 3.9x
SPS Commerce, Inc.  SPSC 2008 -$1,926,000 -$1,691,000 $49,160,000 29.1x
Textura  TXTR 2012 -$2,235,000 -$3,796,000 $75,000,000 19.8x
Twilio  TWLO 2015 -$22,530,000 -$29,380,000 $150,000,000 5.1x
Ultimate Software  ULTI 1997 -$10,309,711 -$10,303,342 $32,500,000 3.2x
Veeva Systems Inc.  VEEV 2013 $3,543,000 $29,245,000 $217,000,000 ---
             
Payments            
Square  SQ 2014 -$108,508,000 -$138,588,000 $243,000,000 1.8x
             
E-Commerce            
Amazon  AMZN 1996 -$284,000 -$2,949,000 $48,000,000 16.3x
Alibaba  BABA 2013 --- $1,927,000,000 $25,000,000,000 ---
Overstock.com, Inc.  OSTK 2001 -$6,598,000 -$902,000 $39,000,000 43.2x
Shutterfly  SFLY 2005 $5,681,000 $7,754,000 $87,000,000 ---
Wayfair, Inc.  W 2013 -$11,035,000 $18,634,000 $319,000,000 ---
Blue Nile, Inc.  NILE 2003 $15,739,000 $16,310,000 $76,670,000 ---
U.S. Auto Parts Network  PRTS 2005 $5,135,000 $9,196,000 $100,000,000 ---
HSN, Inc.  HSNI 2007 -$47,353,000 -$27,504,000 $2,986,371 0.1x
LightInTheBox  LITB 2012 -$15,638,000 $6,482,000 $78,900,000 ---
             
Median           5.3x

 

In summary, stop risking the business to limit dilution - raise at least 24 months of cash. 

 

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