Too much runway

Too much runway, and you may never take off.

Here’s the write-up I saw in the Next Draft newsletter (hey there, Dave!) that pointed me to a story about Slack’s then-recent venture financing:

Give me some slack … equity. The company’s product is about a year old. But investors just invested $120 million into Slack at a valuation that exceeded a billion bucks, which CEO Stewart Butterfield said gives the company “maybe 60 years of runway at our current burn.” I don’t remember the last time I saw a company with this much user adoption and positive buzz.

The WSJ covered the round, and it’s their quote, so I believe it.

60 years of runway? That’s pretty scary. I saw that quote and thought, “I really hope that’s just an awkward/obnoxious/oblivious way of saying ‘we have big plans that I’m not going to say anything about.’ ”

Turns out they’re going to “start hiring a marketing staff and spending money to add more customers.” Seems like an awful lot of money to push ahead. If they 10x their burn rate (assuming they make no cash from their efforts, which would be a sign of an entirely different problem), that’s still 6 years of cash. I’d have to say that this might be one of those situations that we’ve all read about where a company “wants” to get a $1 billion valuation as a status symbol and so stretches things a bit. But maybe not. The WSJ again:

Butterfield admitted that high investor demand helped convince him to raise the funds even though Slack doesn’t currently need the cash.

Of course, we don’t know the terms that Kleiner Perkins and Google Ventures negotiated, so there’s quite possibly more to the story (and I sure hope so) to explain what seems to be far too much cash on the balance sheet.

That’s not just an idle comment. Money raised has a cost of capital. Equity capital is expensive – Slack has to generate returns for the VCs, and the VCs need to generate returns for their LPs. That clock starts running on the day the money moves, so even by taking $60m less now and taking the rest a year later, Slack should “save” something like $12–18m (20–30% cost of capital). Maybe that sounds trivial, but it Warren Buffett accidentally dropped $12m on the sidewalk, he’d turn around and pick it up.

What situations can you imagine that would justify raising 6–10–60 years of cash in a company that must be (by definition, or you would NEVER use that metric) not FCF-positive? Leave your thoughts in the comments!

Why do I ask it this way? If you are making cash, any money you bring in is normally expected to be inputs into your money-making machine. If you have a good infomercial, you get money, you spend it on more airtime, and you churn out that investment plus your return. When you can profitably deploy capital, you seek more of it. But if you’re doing that, it would be nonsense to think about a burn rate – you don’t have a burn rate if you are producing free cash flow each month.