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Some software startups are losing a million dollars a month. Is this a new bubble?

Adam Cohn

Is the technology sector in the middle of a bubble? People have been worrying about that almost constantly since the last internet bubble popped in 2000 — and now there is some new evidence to back up that concern. An important indicator is the burn rate: how much money are startups losing, per month.

The higher a startup's burn rate, the less time it has to find a profitable business model before it needs to either raise more money or close its doors. And the data suggest that the burn rate among software startups has been rising rapidly in the last couple of years:

Most startups begin with a modest amount of seed funding, then they begin raising money from venture capitalists. Each "series" is a round of fundraising; the blue line at the bottom, called Series A, represents the first infusion of venture capital money. The orange line, Series B, is the second round of fundraising, and so forth.

This chart shows that young startups are burning through cash at about the same rate they did four years ago: around $200,000 per month. But older startups today are burning through cash a lot faster than startups the same age were four years ago. The average startup in its fourth round of venture financing is now burning through $1.6 million per month, about three times the burn rate seen at startups in the same position in 2010. Pitchbook, the company that compiled the data, says that "the burn rate has increased for Series B and later rounds to the highest levels since the height of the tech bubble."

Do these high burn rates mean that we're on the verge of another 2000-style crisis? It's hard to say. It's certainly possible that the high burn rates simply reflect a return to the irrational exuberance of the late 1990s. But it's also possible that companies are spending more money because the markets these new companies are pursuing will be bigger and more lucrative than the ones companies were pursuing 15 years ago. There are a lot more people on the internet than there used to be, and they're doing a lot more stuff, so maybe it's rational to invest more money trying to win them as customers.

Think about Uber, for example, which raised $1.2 billion this summer to fund the expansion of its car-sharing service into new cities around the world. If Uber becomes the dominant car-sharing service of the 21st Century, it could be a really big, profitable business. So the fact that it's burning tens of millions of dollars per month isn't necessarily a cause for concern.

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