Top VC Marc Andreessen Warns Silicon Valley of The 8 Things That Are About to Kill Startups

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“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.”

-Marc Andreessen

The inevitable crash: Investors and startups are burning through millions in cash a month like it’s 1999 — right before the dotcom bubble burst. Netscape founder and investment firm Andreessen Horowitz partner Marc Andreessen is sounding an early alarm that the startup market will crash and that there will be casualties.

Andreessen is now the third investor this month to speak up about the imminent danger to the startup and tech industry. VC Bill Gurley gave a warning in the Wall Street Journal that “Silicon Valley is taking an excessive amount of risk right now.” Fred Wilson, a VC for Union Square Ventures, agreed with Gurley and warned that the amount of money startups are losing, a.k.a. their burn rates, are “sky high all over the U.S. startup sector right now.”

When the startup bubble bursts, the cash flow from investors will stop and the startups that are caught in that phase where they are “spending to grow” before they become profitable are going to be left high and dry — the company Snapchat, for example, has yet to make any money.

What startups are doing wrong: Andreessen explained why high burn rates will be the downfall of many established startups. Even if the startup is flooded with capital, it doesn’t mean they are swimming in cash — they are probably just barely staying afloat because of their massive overhead costs, sucking out the life-blood of VC funding.

These are the reasons why those startups may die off according to Andreessen:

1. They got too comfortable. When money is easy to get, you forget how hard it was in the wild, and when the cash stops and you run out, you “vaporize.”

2. The company is too big. The bigger the company, the higher the operating costs, and when you are headed for a time of shortages, the company gets harder to steer and a crash becomes inevitable.

3. The startup is hiring too much. In times of plenty, it’s easy to think bringing on more workers will fix everything. “Your managers get trained and incented ONLY to hire as [the] answer to every question. [The] Company bloats and becomes badly run at [the] same time.”

4. The company has a nice office. With an equally impressive monthly rent, I’m sure. “Lots of people, big shiny office, high expense base = Fake ‘we’ve made it!’ ”

5. The company keeps raising money. Throwing more money into the furnace never helps and you end up having to depend on it more. “High-cash-burn startups almost never survive down rounds. VAPORIZE.”

6. The startup raised too much money at too high of a valuation. The bigger they are, the harder they fall, except the company set itself up for this one. “You probably had to raise too much cash at too high valuation before; escalates down round risk further.”

7. An investor owns too much of the company. “Imagine him owning 80 percent of [the] company after [a] down round. How nice will he be then?”

8. The company doesn’t change its spending habits. High overhead and generous wages after the market D-Day will become a red flag. “Nobody will want to buy your cash-incinerating startup. There will be no Plan B. VAPORIZE.”

What they should be doing: It’s time to go Spartan with our startups. While Andreessen’s warning is aimed at the larger, million dollar-funded startups, when the market crashes, smaller startups won’t be unaffected. However, based on all the ways the larger ships will sink, we can make some assumptions on how to stay safe.

Stay lean. It’s not going to be fun, but keep your startup as small as possible. Keep the team as small as possible, lower the business’s budgets and maybe even consider cutting your own wage as the founder. This is definitely not the time to “look” like success — your work must speak for itself. Efficiency and turning a profit is the only way to look safe to investors.

Work hard. You should always work hard, of course, but I mean work like it was year one for your startup. Get creative and hustle if you want to survive. If you are the founder of the company, you have no set hours of working — you are always working. Impassion your team and lead by example. Remember, this has all been done before; Jack Ma was once the founder of an “underdog” startup.

Andreessen’s last piece of advice is to “Worry.” Sure, things always get hyped in the media, but this ominous warning shouldn’t be taken lightly. Batten down the hatches; hard times are coming.

You can read Andreessen’s full Twitter rant below:

Source: Business Insider Image via Youtube

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