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.
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.
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.
Important Disclosures
This material has been distributed solely for informational and educational purposes only and is not a solicitation or an offer to buy any security or to participate in any trading strategy. All material presented is compiled from sources believed to be reliable, but accuracy, adequacy, or completeness cannot be guaranteed, and Contrary LLC (Contrary LLC, together with its affiliates, “Contrary”) makes no representation as to its accuracy, adequacy, or completeness.
The information herein is based on Contrary beliefs, as well as certain assumptions regarding future events based on information available to Contrary on a formal and informal basis as of the date of this publication. The material may include projections or other forward-looking statements regarding future events, targets or expectations. Past performance of a company is no guarantee of future results. There is no guarantee that any opinions, forecasts, projections, risk assumptions, or commentary discussed herein will be realized. Actual experience may not reflect all of these opinions, forecasts, projections, risk assumptions, or commentary.
Contrary shall have no responsibility for: (i) determining that any opinions, forecasts, projections, risk assumptions, or commentary discussed herein is suitable for any particular reader; (ii) monitoring whether any opinions, forecasts, projections, risk assumptions, or commentary discussed herein continues to be suitable for any reader; or (iii) tailoring any opinions, forecasts, projections, risk assumptions, or commentary discussed herein to any particular reader’s objectives, guidelines, or restrictions. Receipt of this material does not, by itself, imply that Contrary has an advisory agreement, oral or otherwise, with any reader.
Contrary is registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940. The registration of Contrary in no way implies a certain level of skill or expertise or that the SEC has endorsed Contrary. Investment decisions for Contrary clients are made by Contrary. Please note that, although Contrary manages assets on behalf of Contrary clients, Contrary clients may take any position (whether positive or negative) with respect to the company described in this material. The information provided in this material does not represent any investment strategy that Contrary manages on behalf of, or recommends to, its clients.
Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, company or product made reference to directly or indirectly in this material, will be profitable, equal any corresponding indicated performance level(s), or be suitable for your portfolio. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Investors should seek financial advice regarding the appropriateness of investing in any security of the company discussed in this presentation.
Please see www.contrary.com/legal for additional important information.
