Venture Capital is a high-risk, high-reward game. Everyone knows that. That being said, there is an intangible trait that the best founders have, and that is being a good steward of capital. Founders either have this trait, or they don’t. There was a great piece written about capital stewardship by @Kyle Harris in his substack Investing 101.
In this article, Kyle goes deeper into the question of when and how to burn capital. He pulls from some great examples of doing it wrong- Adam Neuman (WeWork) and John Foley (Peloton). These founders famously lit copious amounts of capital on fire with nothing to show at the end of the line.
Cash burn needs naturally drive the EV of a business. In the case of B2B Software, the ultimate driver is growth (ARR), gross margin, and retention. So it could be a good investment to burn capital to achieve those purposes. On the other hand, prematurely burning without clarity and data to support that you have product market fit or over-hiring on an executive level is a great way to destroy EV fast.
A founder needs to respect an investor’s money. Just because it is a high-risk game doesn’t give them the right to spend frivolously. Founders think they are lean just because they don’t have water slides. This is false. Bloated headcount with no tangible evidence to increase EV while burning cash is irresponsible. As we are seeing today, there is not always another fundraise.
