Some Tech Start-Ups Starting to Hoard Cash, Something That Was Unpopular in Boom Times

New York Times writer Erin Griffith reported this week that, “Mark Frank, who runs a health technology start-up called SonderMind, had planned to wait until the end of 2020 to raise more money for his company.

“But after Uber and Lyft stumbled when going public and WeWork ousted its chief executive and pulled its initial stock offering, Mr. Frank changed his mind. With so much disappointment clouding start-up land and an economic slowdown looming, he decided that having more cash on hand was the better course.

“SonderMind, which raised $3 million in April, has 80 percent of that money left, Mr. Frank said. To increase the start-up’s ‘runway,’ or the amount of time before it runs out of cash, he decided to spend less than planned, and to be extra safe, he began informal conversations with investors for a new round of fund-raising early next year.”

The Times article noted: “‘The question is now, ‘Do we push that timeline up even further?” said Mr. Frank, 41, who is based in Denver.”

Ms. Griffith stated that, “Tech start-ups, which have enjoyed years of easy money and fast growth, are preparing for a potential downturn by doing something that was unpopular in boom times: hoarding cash. Many young companies are spending less and raising more than they planned, said Scott Orn, chief operating officer at Kruze Consulting, a San Francisco firm that provides accounting and human resources services to more than 200 start-ups.

“In the first three months of the year, Kruze’s clients had an average cash balance of $3.5 million. By September, that had increased to $4.5 million, he said. And start-ups that began the year burning $260,000 a month had, on average, reduced that to $230,000, he said.”

The Times article added that, “Stockpiling cash is at odds with the model of most venture capital-backed start-ups, which typically raise piles of money to spend on growing faster. Many investors are now pushing their companies to turn a profit.

“Joe Horowitz, an investor at Icon Ventures, a venture capital firm in San Francisco and Palo Alto, Calif., said he had recently met with two companies in one day that were raising unplanned ‘interim’ rounds of funding to safeguard against a difficult environment next year. He said those were prudent moves.”

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