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.

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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