Practical analysis for investment professionals
03 October 2014

Weekend Reads for Investors: Burn Notice

Six years ago global equity markets were reeling in the aftermath of the Lehman Brothers collapse. Credit markets seized up overnight, exacerbating a liquidity crisis that brought the worldwide financial system to the brink of disaster. This helps put the recent pull-back in stocks in perspective but also serves as a reminder that circumstances can turn on a dime. Prior to the 2008 meltdown, Citigroup’s (C) then-CEO Chuck Prince acknowledged as much when he quipped, “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Of course, history shows the music stopped shortly thereafter.

The current bull market has been led of late by an increasingly small band of stocks, principally from the technology sector, and such narrow market breadth should be cause for concern for all but the most intrepid of investors. Even those who make a living in the high-wire world of venture capital are sounding a note of caution. Three prominent tech investors recently weighed in on the state of Silicon Valley and a liquidity crisis of a different sort — cash burn rates. Their sober warnings, recapped below, may have played a role in further dampening Wall Street’s mood as the third quarter came to a close.

Bill Gurley, Benchmark Capital

In an interview with the Wall Street Journal,  Gurley said, “I think that Silicon Valley as a whole, or that the venture-capital community or startup community, is taking on an excessive amount of risk right now — unprecedented since ’99.”

He continued, “The average burn rate at the average venture-backed company in Silicon Valley is at an all-time high since ’99 and maybe in many industries higher than in ’99.”

Fred Wilson, Union Square Ventures

Wilson chimed in on his blog, applauding Gurley’s focus on burn rates: “Burn rates are exactly that. Burning cash. Losing money. Emphasis on the losing. And they are indeed sky high all over the US startup sector right now. And our portfolio is not immune to it. We have multiple portfolio companies burning multiple millions of dollars a month.”

He concluded, “At some point you have to build a real business, generate real profits, sustain the company without the largess of investor’s capital, and start producing value the old fashioned way.”

Marc Andreessen, Andreessen Horowitz

Paraphrasing Warren Buffett, Andreessen took to Twitter to add, “When the market turns, and it will turn, we will find out who has been swimming without trunks on: many high burn rate [companies] will VAPORIZE.” His parting warning:

Below are some other stories that caught my eye in recent weeks.

Strategic Thinking

Taking Stock

The Financial Crisis Revisited          

High Profiles

Gross Negligence

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Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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About the Author(s)
David Larrabee, CFA

David Larrabee, CFA, was director of member and corporate products at CFA Institute and served as the subject matter expert in portfolio management and equity investments. Previously, he spent two decades in the asset management industry as a portfolio manager and analyst. He holds a BA in economics from Colgate University and an MBA in finance from Fordham University. Topical Expertise: Equity Investments · Portfolio Management

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