18 months of cash is the bare minimum you should raise

In our view, when raising money a startup between the seed and Series B stages should raise at least 18 months of cash.  The thinking goes that it will take 4 to 6 months to raise any round, so if you raise 18 months’ worth, you’ll have 12 months to show a lot of traction before you need to start raising again.  12 months is a good amount of time to make meaningful strides and in turn increase your valuation at the next round, although it doesn’t allow for mistakes or unforeseen slowdowns.  You have to perform as planned.   

 

18 months has always been more of a rule of thumb than anything else so we looked at 47 publicly traded SaaS companies’ balance sheets to see where their cash levels are.  Specifically we looked at quarterly balance sheets for the past year, comparing them to latest trailing twelve months EBITDA and Free Cash Flow to determine the cash to burn ratio.  The complete data set is at the link below.  Conclusions are as follows:

 

https://www.dropbox.com/s/yexmjdip6g0phjw/Cash%20Balances%20of%20Publics.xlsx?dl=0

 

-SaaS companies don’t generate a lot of cash.  Of the 47 companies, 30 are still burning cash on an EBITDA basis and 15 are still burning cash on a Free Cash Flow basis (because SaaS companies derive a nice cash benefit from deferred revenue, FCF should be better than EBITDA).  The median EBITDA of the entire 47 company data set was -$18mm and median free cash flow was only $15mm

 

-Companies tend to keep at least 1.9 years of cash on hand relative to EBITDA losses.  Over the 4 quarters, the minimum median Cash/EBITDA was 1.9 years for the 30 companies in the data set still losing EBITDA.  In other words, of the 30 companies showing EBITDA losses, on median they tended to have at least 1.9 years of cash available to cover their burn. 

 

-Companies tend to keep at minimum 2.2 years of cash on a FCF basis.  Over the 4 quarters, the minimum median Cash/FCF was 2.2 years for those companies still burning FCF.   In other words, of the 15 companies showing Free Cash Flow burn, on median they tended to have at least 2.2 years of cash available to cover their burn. 

 

MEDIAN QUARTERLY CASH/EBITDA   MEDIAN QUARTERLY CASH/FCF
30 companies in this data set   15 companies in this data set
Q4 Q3 Q2 Q1   Q4 Q3 Q2 Q1
2015 2015 2015 2015   2015 2015 2015 2015
2.0  yrs 2.0  yrs 2.5  yrs 1.9  yrs   4.5  yrs 4.6  yrs 5.8  yrs 2.2  yrs

 

 

In conclusion, the big SaaS players that are still in burn mode tend to hold at least 2 years of cash on the balance sheet.  That’s higher than we expected, given these are big companies with liquid stock and easier access to debt and equity capital.  One of the reasons the big boys need to keep a large amount of cash on hand is because they’re not growing like a startup (median YOY growth of the 30 EBITDA losers is 35%) so they can’t grow out of the burn so to speak.  That said, 2 years is still a lot of capital, especially since these public companies  didn’t just IPO meaning when they did IPO, they raised way more than 2 years of capital.  SecureWorks for instance, which just went public last week, was hoping to raise at least $140mm whereas they had FCF burn of -$13mm for the 9 months ended October 2015 for a Cash/FCF burn ratio of 10.8x.  They ended up raising only $112m as the IPO underperformed, but still plenty of cash relative to FCF burn. 

 

Even though a startup needs to keep dilution in mind, the data leads us to believe raising more cash for a longer runway is prudent.  It’s something to think about next time you hear a startup is only raising 9 to 12 months of runway in a bridge.  Take at a minimum of 18 months’ worth of cash at your next round and more if you can get it.  

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