The arrival of a new crop of internet giants and the explosion of tech-focused venture capital are pushing some startups to spend money at a breakneck pace, while others go to great lengths to save.
It's easy to get lost in the numbers when talking about how much money your favorite startup is burning through.
New York-based media company BuzzFeed, for example, recorded $370 million in revenue last year and has raised more than $1 billion in venture capital. In its most recent quarter, BuzzFeed spent $40 million on "content rights," which includes things like paying people to create original content (like lists) and licensing clips from other companies (like viral videos). It also spent $11 million on research and development, or R&D — a big jump from the previous year.
At the same time, BuzzFeed CEO Jonah Peretti told investors last month that his company was spending less on technology than it was a year ago because it had built up enough infrastructure to run efficiently. And he said BuzzFeed would likely spend less money on R&D going forward as well because it already has plenty of tools in place for its employees to use.
The dichotomy of BuzzFeed's spending habits is hardly unique among startups these days: The high cost of talent combined with low interest rates for borrowing has led many young businesses to spend freely as they grow into profitable companies. At the same time, though, some startups are watching every penny as they try to conserve cash so they can survive the tough unforeseen market fluctuations.
Both approaches are creating winners and losers, with implications for the broader economy.
The number of young companies with more than $1 billion in revenue is tiny. Just one has reached the milestone in the last five years: Uber, which became a public company in May 2019.
But there are many more startups that have raised money at valuations that exceed $1 billion. These companies are flush with cash and watching every penny.
The two approaches are creating winners and losers, with implications for the broader economy.
The winners: Investors who have poured billions of dollars into private companies have been rewarded by their investments in Lyft Inc., Slack Technologies Inc., Pinterest Inc. and other high-flying startups that have become publicly traded companies within months of going public.
The losers: Startups that failed to attract funding from big investors — or couldn't raise enough cash — are being forced out of business by ever-higher rents, health care costs and other expenses required to run a business but not covered by their leaner balance sheets. Some say it's almost impossible for them to compete with larger rivals that can afford to pay more for talent and services.
"It feels like there is an arms race among startups," said Steve Berkenbush, chairman of the startup advocacy group Startup Colorado and chief executive officer at Bizness Apps Inc., which develops software for small businesses to easily create, edit, and manage an iPhone app online without any programming knowledge needed.
Most startups today have access to far more cash than they did a decade ago, allowing them to invest in technology, hire a large staff or develop products and services quickly.
In the early years of the internet boom, startups were often forced to make do with limited resources.
"When I started my first company in 1999, we had a budget of $50 million and it was a huge amount of money," says Michael Lazerow, co-founder and CEO of PPC agency MediaPlant. "Nowadays, startups can raise $50 million or more in venture funding with no real product."
Today's startups have access to far more cash than they did a decade ago, allowing them to invest in technology, hire a large staff or develop products and services quickly. But the influx of money has also made it easier for companies to burn through their cash reserves without generating much revenue — or any at all.
"It's very easy for startups to get into trouble because there is so much money available," says Lazerow. "The key is knowing how much you need at each stage of development and then raising just enough."
That dynamic has helped fuel rapid growth in the number of new companies, jobs and economic output from some sectors.
One of the biggest trends in the U.S. economy over the last decade has been the rise of startups.
The number of new companies, jobs and economic output from some sectors has grown faster than the overall economy. There are now more than 20 million private companies in the U.S., compared with 3.5 million in 1997, according to Census Bureau data. And venture capital funding of new companies hit a record $174 billion last year—the most since 2000—according to PricewaterhouseCoopers and NVCA Venture Monitor report.
That dynamic has helped fuel rapid growth in the number of new companies, jobs and economic output from some sectors, such as software development and business services. But it also has contributed to rising inequality by concentrating wealth among a small group of investors who back those new companies.
"There is a lot more money chasing fewer deals," said Mark Suster, an entrepreneur-turned-venture capitalist at Upfront Ventures in Los Angeles. "That means we're going to see fewer unicorns."
Many startup founders say they never want to be dependent on banks for loans or investors for funding again.
It's been quite a few years since the financial crisis, but many startup founders say they never want to be dependent on banks for loans or investors for funding again. They're building their businesses with their own money and keeping their expenses low.
"I think you'll see a lot more of this," said Paul Graham, co-founder of Y Combinator, which invests in startups and is a bellwether for the tech industry. "People are realizing that it's not just about raising money from VCs, it's about how to make it work without them."
The mindset is spreading rapidly among entrepreneurs who have built companies with little or no outside financing. It's also becoming more common among bigger companies like Google, which has adopted a philosophy called "don't be evil" that has become a rallying cry for the growing community of entrepreneurs who believe that profit isn't everything.
"It's an incredibly powerful idea," said David Cohen, chief executive officer of e-commerce company TechStyle Fashion Group Inc., which has grown by reinvesting profits rather than taking on debt or selling shares. "You can build an incredible business without diluting control or giving away any equity."
This is not to say that startups are penny-pinching. After all, these businesses often have millions in funding from angel investors and venture capital funds. The point is simply that startups are becoming increasingly aware of the importance of controlling their costs, especially at this early stage of their growth cycle. They know that every penny saved today could make a difference down the road, once they reach maturity and begin to generate revenue. Not to mention that startups are competing with each other for a limited market pool. In short, startups can no longer be as reckless with their spending habits as they may have been before, because there are now more smart businesses vying for success than ever before.