Musings on Markets · 2016-08-19
· 3576d
Understanding Cash Burn in Venture Capital: When Growth Investment Becomes Value Destructive
This article examines cash burn in early-stage companies, distinguishing between benign cash burn that signals healthy growth investment and malignant cash burn that indicates unsustainable business models. The author uses Uber as a case study to illustrate how operating margins, reinvestment rates, and market competition determine whether negative cash flows are temporary or fatal.
Metrics in this report
Cash Burn Period
6-10years
scenario dependent
Length of negative cash flow period before company viability questioned
Operating Margin Target
20%
year 10 projection
Uber benign scenario (ride-sharing success case)
Operating Margin Target
5%
year 10 projection
Uber malignant scenario (commoditized market)
Sales to Capital Ratio
3ratio
efficient reinvestment
Uber benign scenario
Sales to Capital Ratio
2ratio
typical US company
Uber malignant scenario