Businesses are intricate beasts. Often, people talk about things like growth and profitability as switches that can be turned on and off. But the reality is that every aspect of a business is inextricably connected to another part. That is nowhere more true than when it comes to cash burn.
When the market turned at the end of 2021, layoffs were a pretty quick solution for a lot of companies. In 2022, over 1K companies laid off 164K employees. That number jumped in 2023 to over 262K employees.
Take Brex, for example. In October 2022, Brex announced it was laying off 11% of its 1K+ employees. This wasn’t surprising given the market. In April 2022, the company had announced an attempt to focus more on larger customers, and in June 2022 it moved away from small businesses as customers.
Even while dealing with the loss of its CRO and CFO, Brex still seemed to be making the right moves to “turn on sustainability” as a business. The first thing the shift to sustainability hits is typically growth. In November 2023, Brex shared that its annualized revenue at the end of Q3 had hit ~$283 million; up just 1% since the prior quarter.
First comes declining growth, then comes exacerbated burn.
This past Tuesday, The Information reported that despite all the steps the company had taken over the course of 2022 and 2023, Brex was still burning $17 million of cash per month. Over $200 million per year. In addition, Brex announced this week it was laying off an additional 20% of employees.
Now, the positive spin for Brex is that the company has raised ~$1.5 billion in funding, and claim to have four years of runway. And the effectively flat growth is a combination of (1) churning customers as it moves away from SMBs to larger customers, and (2) a pull-forward from the failure of SVB leading to a spike in Brex customers. So the company can still figure things out, and could potentially hit its target of being cash flow positive in 2025 ahead of a potential IPO that year.
But the reality is, companies will continue to have to cautiously pay attention to what is happening in the public markets. According to one report, a number of private tech companies did reduce burn in 2023.
Source: Scale Venture Partners
But, as discussed earlier, the exacerbation of reducing burn can often have a negative impact on revenue growth, which can keep cash burn as a percentage of revenue relatively consistent.
Source: Scale Venture Partners
As of January 2024, public tech companies expect over the next twelve months to see their revenue growth drop from 21% to 14%, while their overall free cash flow margin improve from 9% to 14%. Despite the continued performance of the stock market overall, many private companies who are considering a potential public debut should be cautiously observant of what the public markets are rewarding, and what they are punishing.
