It all comes down to the burn rate

The importance of operational expenditure within early dotcom businesses

Within this episode, we explore the importance of operational expenditure within early dot-com businesses, particularly after the downturn that followed the dot-com bubble’s peak in early 2000. In doing this, we follow the concept of burn rate through our email archive to show how this measure of operational expenditure became central to AuroraTec (a pseudonym) and its post-bubble strategy.

What is a burn rate?

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New millennium, new realities

The run-up to “Y2K” had seen extraordinary stock performance by dot-com companies in markets like the NASDAQ, which were taken as a key indicator of the industry’s performance. However, following a sharp decline in the spring of 2000, the performance of listed dot-com stocks had entered a steady downward trend, with investors selling up their stocks. While there was still a general sense of optimism about the future of such enterprises, the venture funders who invested in pre-listed start-ups were taking a notably more conservative (or "bearish") view of any new and continued investment in technology and internet start-ups.

NASDAQ at close

Glum stockbrokers react to the NASDAQ crash. Credit: Getty Images (c/o The Wall Street Journal).

Burn rate makes the agenda

These new, leaner market conditions, required start-up companies like AuroraTec to seriously consider operational issues, which were becoming increasingly important investment issues for the more conservatively minded investors. At the same time, these businesses also need to continue the initial development and marketing of their products, a generally expensive period in a business’s growth. Thus, on a Thursday evening in August 2000, AuroraTec’s CEO and founder clicked ‘send’ on an email to the board. It contained a brief summary for the next month’s meeting and rattled off in shorthand the various items for discussion, along with who would cover what. Towards the end of his message – behind updates on issues like sales, marketing, and engineering, were the words burn rate.

From: Ravi Chowdury
Sent: Thursday, August 24, 2000 7:19 PM
To: Bahar Tanveer; Jack Moon; Victoria Grahame;
Jerry Brabham; Dhruv Bakshi
Subject: Board meeting on Friday, Sept 1

The proposed agenda for this meeting is as follows. Please let me know if you want to discuss any additional items:

Closed Meeting (2 hours):

Timing for hiring bankers and related issues (Rob to help here) Investment policy

Update on executive searches (Philip Martins to help here) Option grants

Business Update (2 hours)

Sales update (organization, pipeline, Issues/key learning)
Marketing update (organization, competitive outlook, positioning, priorities)
Engineering update (organization, product roadmap, release status)
Update on Europe and Japan
Enterprise Biz Dev (organization, key successes, plan to leverage partners, priorities)
Finance and Admin (organization, financial report, burn rate, headcount, facilities)
Budget for next four months (Lori/Jenny to help here)

Ravi Chowdury
Chief Executive Officer
AuroraTec

From: Ravi Chowdury
To: Victoria Grahame; Bahar Tanveer; Dhruv Bakshi;
Gary Springer; Jack Moon
Subject: team update
Date: 03 Jun 2001 21:38:13 UTC

I was stung by the intensity of perception among board members that there is something seriously amiss in the company in terms of teamwork and focus. I have done my own investigation and conversations with key members of the executive team and here is what I found.

Teamwork: James Plattes’ criticism here hits home. This perception is driven by the ambiguity around the role of founders, run-ins that some executives had with Oliver, and by my style of seeking the broadest input before making key strategic decisions (and not just from the E staff members) which in turn was perceived as lack of decisiveness by some members. The issue regarding my style frankly came as a surprize to me because no one had brought up this issue before me - not even James Plattes. I pride myself on having a forthright relationship with my E staff based on candor and it surprized me that even James never brought it up before me. The good news is that with the departure of James Plattes we are back to the situation we have always been - no one leaves the company unless I push them out the door. Gray is not leaving, Martins thinks he is having greater job satisfaction now than he ever had before, and to my surprize, even Jacob Wong wants to continue even though he knows that I am going to chop his group further this time. Amit obviously is not leaving. So all the core members of the E Staff will stay put. The hiring effort for VP of sales has started in ernest.

Focus: I have yet to find any evidence or perception that we are un-focussed other than the people telling me that James believed that we are not focussed. I will continue my investigatation. The issue of focus is life and death issue for the company and I will make sure that the reality of focus and the perception of it are aligned with each other.

Action Plan:
1. Hired team coach, Hugo Andrews (thanks Gary). Already talked to him twice about go forward steps. He will be here on Wednesday participating in the team meetings and in one-on-ones.
2. Will talk to Oliver and Jane on Tuesday about absence of any roles for them going forward.
3. Team meeting will take place on Wednesday to decide on: strategy going forward, headcount reduction plans, and approaches to contain the fallout both externally and internally. 4. Restructuring goals:
Phase 1: Next week: reduce headcount here by 31 (max allowed under WARN act) and in Europe (minimal headcount of 3 so as not to impair our relationship with Capitalize. They need our help in Europe so as to discourage Capitalize Europe from evolving a mobile strategy independent of the US)
Phase 2: First week of July: sales force reduction including the current managers
Phase 3: After the ASP business is transitioned to some other partner, another 10 persons. The value of India operations and its size will also come into investigation at that stage.

Ravinda Chowdury
Chief Executive Officer
AuroraTec, Inc.

The headcount takes a hit

While AuroraTec weathered the initial crash fairly well, by June 2001, things were really not looking so good. Not only was Ravi having to respond to criticism from some of the board about internal ‘teamwork’ and ‘focus’ issues within the company but he was also having to make some difficult decisions to reduce the company’s burn rate. The “action plan” he set out to management primarily involved widespread headcount reductions and an almost exclusive focus on issues of an administrative and financial nature.

Burn rate beyond AuroraTec

Similar issues became increasingly critical for many dot-com companies in 2001, and AuroraTec was not alone in tackling its burn rate with heavy job cuts. Confidence in the dot-com economy had evaporated and investors were reluctant to continue funding high-cost, low revenue ventures. All too often over the past two years, start-ups had been allowed to grow exponentially, based on investor optimism, but with little realistic hope of matching their oversized operations and marketing budget with actual sales income.

Just the day after Ravi shared his action plan with the board, another AuroraTec exec shared an email conversation with an external contact from another dot-com. Both businesses recognized the need to bring down the burn rate as a priority, and extensive reductions within their respective firms were in effect. In both cases, they needed to reduce how much cash they were spending, and the quickest way to do this was to reduce the number of employees they were paying.

From: Jane Pregnolato
Sent: Monday, June 04, 2001 9:49 PM
To: John Price
Subject: RE: Hello!

Thanks for the message, it's good to hear from you. Unfortunately we're not being spared. We have reset objectives for the year and as a result need to bring down the burn rate. As you know, the easiest way to do this is through hc reductions. We've already had one layoff and will be doing another shortly.

[Redacted]

All in all, these are certainly challenging times. I would love to catch up, I will email you some options tomorrow.

Take care and good selling!
Jane

From: John Price
Sent: Tuesday, June 05, 2001 6:38 AM
To: Jane Pregnolato
Subject: RE: Hello!

Well, everyone seems to be doing the same thing. We've reduced our company by about twenty per cent since the beginning of the year. We've also stopped using contractors. That has significantly reduced our burn rate, but we still need more money, which we are in pursuit of right now. I have a feeling this is going to be with us for a while. It was fun while things were going up, but now the piper is going to be paid.

[Redacted]

I'll look forward to our getting together as soon as possible. In the meantime, stay well.
John

Close to home

Unfortunately for Jane, the changes took on a more personal significance when she found out that she too was to be a casualty of the cost reductions.

From: Jane Pregnolato
Sent: Wednesday, June 06, 2001 12:16 PM
To: 'Price, John
Subject: RE: Hello!

Well, with every day there is a new twist. Today's twist...my position is being eliminated...bummer! I have a position for the next 45 days with the primary purpose being to find a hosting partner that will take over our ASP business.

[Redacted]

Talk to you soon...Jane

Pushing back on the lean approach

Even after the first round of downsizing cuts, the pressure was still on AuroraTec to again reduce its burn rate. Thus, in a planned presentation to the board, Ravi proposed they plan to reduce its burn rate from $2.3 million per month to $1.8 million and combine this with a quarterly sales target of $2.4 million. On seeing a draft of the presentation, not everyone was convinced, with one founder/manager in particular voicing concern about the realities of both the sales and burn rate targets.

From: Amit Patel
Sent: Tuesday, July 10, 2001 3:16 PM
To: Ravi Chowdury; Jack Bevin
Subject: RE: 7/11 AuroraTec Board Presentation

I have two comments.

There is nothing in the pipeline that gives the visibility to predict a $2.4 M sales target for Q4. Q4 is a short quarter. Both Europe and Japan targets for Q4 are very aggressive which makes it even more unrealistic. We are not giving any specifics on how we are planning to reduce the burn rate to $1.8M from the current $2.3M. I would rather see some specifics here or a more reasonable target.

Amit

From: Jack Bevin
Sent: Tuesday, July 10, 2001 3:21 PM
To: Amit Patel; Ravi Chowdury
Subject: RE: 7/11 AuroraTec Board Presentation

the composition of the revenue is in the charts, so thats where the numbers come from. quite a few companies have the year end in december so a short quarter does not mean lower revenue - in fact for many Q4 is the biggest quarter of the year. biggest risk is ramping our services and licensed business.

the burn rate reduction is a product of increased revenue while progressively managing down expenses in areas such as hosting.

i guess we'll discuss in more detail tomorrow.

From: "Amit Patel"
To: "Jack Bevin", "Ravi Chowdury"
Subject: RE: 7/11 AuroraTec Board Presentation
Date: 10 Jul 2001 22:30:24 UTC

I think we can reduce the burn rate to some extent by controlling cost. But to get it down from the current $2.3M is not realistic in mu opinion unless we get out fo this building with the potential of a new CEO coming on board.

From: Ravi Chowdury
To: Jack Bevin
Sent: Mon Sep 17 11:58:51 2001
Subject: Memo to management team

I intend to send the following email to the key managers in the company. Please give feedback: whether it is necessary, and whether the content is right.:

"As of today, I am stepping back into the day to day operations of the company. The Board has decided that there is declining marginal utility in me continuing to focus externally and they have asked me to focus on internal operations as well. As some of us have discussed in the last couple of weeks, the company will focus on only a few things going forward:

1. Discipline to bring the net cash burn rate to a level that ensures the company outlasts the downturn
2. Growing the Japan revenue base
3. Penetrating the PSystems installed base with our mobile solutions and use it as a beachhead to fan out to other applications in the installed accounts. The goal is to get at least 3 pilots by the end of the Q4.
4. Finally, reigniting the passion in the company towards accomplishing the above three objectives.

As far as the reporting structures go, the existing arrangements will continue. Gary and Amit have done an outstanding job of keeping the teams together and focused. I see no reason to change that."

Looking forward to hearing from you.

Ravi Chowdury
Chief Executive Officer

Time for a change

Nonetheless, by September, the board had decided that more drastic action was needed, instructing Ravi to focus on the internal operations of the business, rather than the external interests like new business and funding opportunities. Number 1 on his list of priorities was bringing the burn rate down to a level that would ensure they would survive the downturn they were currently experiencing. While he did not tell his teams as much, the figure he had in mind here was $1 million per month, so way below the $1.8 million target his colleagues had been failing to realize.

A matter of do or die

A week later, Ravi started providing weekly updates to the team, in which he reported on the response to burn rate-related downsizing. He assessed the response as mixed, acknowledging the grief that some employees felt, but also believing that there was an acceptance that such actions were consistent with the bust conditions of the market.

From: Ravi Chowdury
Sent: Mon Sep 24 22:08:12 2001
To: Victoria Grahame; Jerry Brabham; Bahar Tanveer; Dhruv Bakshi
Subject: Update

Given the circumstances, I thought it might be worthwhile to give you guys an update on a weekly basis on the key challenges facing the company. So here it goes.

1.Soft Solutions: We finally have an agreement with them. The rental comes down from $340k per month to $62k per month. Even better, the net cash ouflow from the company over the next 13 months (beyond the money tied up in deposit) is only $360k which pro-rates to a monthly charge of only $20k. This is a net saving to the company of about $2.5 million. This is what the company has already gained from my limited engagement back in the company over the last 3-4 weeks.

2. Burn Rate: Layoffs got done last Wednesday per the plan discussed on Sept 15. Employees reacted with shock and grief initially but showed encouraging signs of being fully engaged. In general, there is good understanding of the reasons behind this action and relief at giving ourselves a longer runway of 20 months without factoring in any incremental revenue. There is concern about the "Do or Die" message inherent in new focus but there is also understanding that this kind of narrow focus is consistent with market conditions. Real test of whether the employees are buying this message will come over the next 2-8 weeks - in terms of their intensity and their workhours and also in terms of voluntary departures. We lost six employees since August after I announced the new CEO search which is about as many as we had lost in the entire 2.5 years before August. Let us see if the pace of employee departures slows down significantly. Some of the employees had to be kept a little longer for them to wind up current projects. Employees in HR, General Counsel, some engineers in the middle of next release, and one biz dev person fall in this category. Most of these situations will become final by October 15 bringing our payroll closer to the target of $750k per month.

3. Growing Japan Revenue Base: On path to achieve the forecast of $430k for this quarter and $500k next quarter. Chances are the numbers may be higher next quarter.

4. Signing up 3 pilots by the end of the year: Sales and biz dev has been refocused only on building the pipeline for qualified prospects. From existing activity two accounts qualify: Razor and BioSoft. The focus is on Capitalize and PSystems user group to generate more qualified leads. PSystems User Group due in first week of October, may end up being cancelled due to current unease with travel or may have very sparse attendance. Back up plans to get to the PSystems installed base are being investigated. Capitalize, I am told, has become a little hesitant about AT in the last couple of months. I need to make calls to the senior partners to reassure them about AT's future.

5. Transfering the hosting business: One of the objectives was to get a term sheet from Capitalize/BBB by Oct 15. Gary informs me that he has not heard from the concerned Capitalize partner ever since the tragedy in NY. It may be that he is distracted or there might be some other legitimate business issues but the pace of interaction has dropped significantly all of a sudden. We will figure out the reasons and try to find alternatives. Gary has already discussed with I-Stock the potential of their bringing this capability in house.

Will see you guys this Friday at the Board Meeting. If there is any other issue you want to discuss at the Board meeting, please let me know ahead of time.

Cautiously positive news for investors

While even the most profitable businesses want to avoid unnecessarily high burn rates, it was becoming especially relevant to venture-funded businesses that were common in the early dot-com economy. The extraordinary growth and expenditures of these companies were often accompanied by little or no earnings, and while this was ok in the boom, funders, analysts, and lenders were becoming increasingly interested in how long such a company could survive at a given burn rate.

From: Peter Delany
Sent: Friday, November 02, 2001 11:46 AM
To: Ravi Chowdury
Subject: Update

Hi
How are things going?
I would like to schedule some time with you over the next couple of weeks; can you provide a couple of dates. Also, we are doing an update to our portfolio companies and can you provide us with the following information:
Number of employees
O1 and 02 revenue forecast
Cash as of 10-1-01
Anticipated quarter at breakeven
Monthly burn rate
Thanks

Peter R. Delany
Co-founder and General Partner
Brilliant Ventures

A typical boardroom scene from the early 2000s. Credit: iTechVision

While AuroraTec still had limited actual sales revenues to back up the investments from funders, its heavy cost-cutting efforts in the months before had at least enabled it to show investors that they were serious about running a lean operation that matched the economic climate and its own sales revenue performance.

From: Ravi Chowdury
To: Peter Delany
Subject: RE: Update
Date: 02 Nov 2001 21:54:56 UTC

Peter,
Belive it or not, things are actually picking up. I refocused the company exclusively on the PSystems installed base in September and this strategy is begining to yield us good results. The enabling product got released in a hurry and we are on the verge of winning a hugely competitive deal at a major pharmaceutical company in the sales force automation space. If we are successful in signing at least 3 Fortune 1000 customers by the end of this year, I will feel confident in saying that we have found the new recipe for our success.
I am traveling to Japan the week of Nov 12. Next week, Friday afternoon is the best time for us to meet - anytime after 1pm is good. Here are the tentative forecast numbers:

Q4: $900k
Q1: $1.25 m
Q2: $1.75 mil

Cash as of Oct 1 (net of all liabilities) $18.3 million

Anticipated break even quarter is Q4 of next year. Our current burn rate is approx $1million per month and is expected to stay at that level or go lower for at least 2 more quarters.

Ravi

In fact, having a burn rate below $1million would become something of strapline for the company’s executives to use with investors, to be cited along with its other achievements like blue-chip clients, steady growth figures, and technical developments. A New Year letter to investors sent out in January 2002, even made a point to note that “with monthly burn rate below $1 million, we have enough cash cushion to last another 18 months in the unlikely condition of continued adverse economic climate forcing little or no growth in revenue.”

From: Ravi Chowdury
Sent: Friday, January 11, 2002 10:39 AM
To: Jack Bevin; Julie Jackson
Cc: Paul Jacobs
Subject: Letter to investors

Here is my cut: a letter to our investors announcing the arrival of Paul coupled with an year-end update. Please make sure that the press release on Paul follows by at least 2-3 days this letter. Could I see the press release as drafted? I had told Paul that there should be a quote from me also in that press release - we need to do that to convey accurately that it was a smooth, orchestrated transition. Here is the investor letter. You may want to put a subject line in the letter if you think it necessary: Sub: AuroraTec on path to glory again and a change of guard.

A path back to glory

Also with the New Year, came a change in leadership for AuroraTec. This change was actively supported by Ravi, who had already tried to leave the company’s internal operations to other founders and placed an actively sales-oriented CEO with “downsizing experience” at the helm of the company. While the company’s management had shown initial resistance to the board’s choice, it was eventually seen as their best chance of increasing sales and growing (rather than downsizing) the business again.

Continuing to count the costs

Although Ravi had stepped out of the CEO’s chair, he was still on AuroraTec’s board and continued to push burn rate as the organization’s key strategic consideration. Even when the new CEO, Paul Jacobs, was negotiating new deals, Ravi was keen to know how the burn rate would be affected. In this way, burn rate was becoming more than just a response to the current situation (i.e., the fact they had been spending too much), and was becoming part of how the company assessed future business decisions.

From: Paul Jacobs
Sent: Thursday, February 14, 2002 5:51 AM
To: Jerry Brabham; Victoria Grahame; Bahar Tanveer; Amit Patel; Dhruv Bakshi; Ravi Chowdury
Cc: Bill Matthews
Subject: Project Park

Park is the code name for the project to divest our ASP business to Capitalize's Mobile Service Bureau. We had a productive meeting in Miami yesterday, and hammered out what I believe is a fair transaction. Details of the deal are contained in the document attached. The bottom line is a $705K transaction with an additional $60K in performance upside. Downstream there is an opportunity to capture more revenue via additional license resale if Capitalize is able to get traction with this new business initiative.

I will circulate the term sheet for approval as soon as it is approved. In the meantime, please call or write if there are any questions,

Best,
P

Paul Jacobs, President & CEO

From: Ravi Chowdury
To: Paul Jacobs; Jerry Brabham; Victoria Grahame; Bahar Tanveer; Amit Patel; Dhruv Bakshi
Cc: Bill Matthews
Sent: Thu Feb 14 11:20:57 2002
Subject: RE: Project Park

The deal looks sound. One question, though. The terms indicate AT is responsible for I-Stock's xml conversion project. In the past, the cost of this effort was estimated at two engineers working for over six months. Is AT eating this as a cost of doing this deal or are we going to be paid separately by I-Stock for this service?

After the transition is complete, how much saving in burn rate are we going to get per month?

Once again, the deal terms are sound. I hope I-Stock gets on board as well.

Ravi Chowdury

From: Paul Jacobs
To: Ravi Chowdury
Sent: Fri Feb 15 00:07:56 2002
Subject: RE: Project Park

Hi Ravi,

Thnx,

We'll be able to do the xml work from India for less than 20K...the plan is to carve out 30" from the renewal fee to cover this work. It's in the business value section of our Capitalize agreement. Ideally, we could even take revenue on this.

The net reduction in cash burn will be the direct costs of Toronto, along with DCI development staff, along with 5 staff. We will reduce by about anothr 125K per month starting Q2.

Will keep you posted,
P

--------------------------
Sent from my BlackBerry Wireless Handheld (www.BlackBerry.net)

New CEO, old issue

As Paul settled into his new role, it became increasingly clear that burn rate control was to remain part of the business’ ongoing strategy, and something they would actively push when selling their venture to potential investors. While the market was still interested in the ‘next big thing’, there was an acknowledgment that this needed to come with a level of conservatism in relation to cost and realism in relation to sales. Perhaps this is why, in addition to noting how well received the company’s aggressive approach to cost control was, Paul also enthused about actually having a “real customer”.

From: Paul Jacobs
Sent: Friday, February 01, 2002 3:39 PM
To: Bahar Tanveer; Victoria Grahame; Gary Springer;
Paul Jacobs; Amit Patel; Ravi Chowdury
Subject: Progress Report

We have had a big week at th e company and I wanted to share with the board a recap of our progress. Monday and Tuesday we hosted Capitalize as part of the due dilligence process for the divestiture of our ASP hosting business. Those meetings went very well, and we have mutual commitment to try and complete that transaction by the 15th of February. I think that date has some risk, but the transaction has high probablility. During a meeting with the Bullseye team (I-Stock) I briefed them on the Capitalize opportunity, and they were supportive.

We had our field sales team in for training all week. As part of that event we did product training, competitive analysis, partner orientations, sales process training, rolled out a pipeline and forecasting system, assigned territories, and delivered compensation plans.

As part of the sales training event, we rolled out our new corporate positioning presentation. I will forward a zipped copy of the presentation under separate cover. The sales team was trained, and role played the delivery during our training event.

Ravi and I met with several investors including Moon, Bullseye, Tempest, and East Software. The response to our new strategy is being received well, and investors appreciate the aggressive approach to cost control as the business moves through its strategy transition.

And most importantly, the big win for this week is our first signed customer order from BioSoft in Cambridge, MA. The order calls for 400 seats of our mobile application for PSystems, and a $100,000 dollar consulting agreement to deliver an integration to MyNotes databases on field seller's laptops. In total the deal is worth approximately $300K in the first half of this year.

Our current goal is to realize half of the order in revenue this Q. The deal includes a firm order for a software drop that gives us a net 30 receivable of just under $100,000. This is very encouraging because we have a real customer! We didn't have to give the first one away....the product will ship on Tuesday.

The next area of focus is to ensure we implement the cost control assumptions in the operating budget and achieve the objectives laid out in the dashboard reports. I'll look forward to being in touch along the way.

Have a great weekend,

Best,
Paul Jacobs, President & CEO
AuroraTec, Inc.

It all comes down to the burn rate

As for Ravi, he was happy to take a step back from the business, knowing that he was leaving it in the hands of someone who shared his priorities of controlling burn rate and that the company itself was in the sort of shape he wanted it to be in. In fact, within his standard copy/paste text used when letting contacts know of the change in leadership, Ravi was sure to point out the low burn rate.

From: Ravi Chowdury
Sent: Fri Mar 8 04:00:26 2002
To: Raj Patel
Subject: Interrested in investment in EDA?

I have recently left AuroraTec after recruiting an outstanding individual to replace me. I felt it was as good a time as any for a transition. We still have a large bank balance, great visibility, pretty low burn rate, and steadily growing revenues. Despite all the difficulties, we were able to grow our revenues to $4.6 million last year. I had spent 3 years there and I felt that a new level of intensity was needed at the top. Right now I am just de-compressing and intend to do so for another couple of months. […]

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