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HR Economics - Even HR Tech Companies Have "Burn Rates"

Definition of a Burn Rate - a synonymous term for negative cash flow. It is a measure for how fast a company will use up its shareholder capital. If the shareholder capital is exhausted, the company will either have to find additional funding or close down.

Illustration of a Big Burn Rate - SuccessFactors, the cool Performance Management on demand companyPetscom_sock_puppett  I have always liked. 

Late last week, SuccessFactors filed their S-1, announcing their formal intent to raise up to $125M (that's million, Dr. Evil) via an IPO.   Jason Corsello of the Human Capitalist did the best job of anyone covering it, so I'll plug his observations of the filing in here, primarily surrounding the BIG burn rate that's going on at the company:

"1.  The company is losing a staggering amount of money. The company incurred net losses of $32m in 2006 and is on track to loss $50m this year

2.  2006 revenues were only $32.5m, significantly lower than I had previously estimated in some market forecasts. They are currently on pace to achieve approximately $65m in revenue this year. As a SaaS vendor, deferred revenue is important. SuccessFactors deferred revenue is currently $56.8m.

3.  Sales and marketing expense is nearly 100% of revenue. The company is spending a lot of money with most of it going towards a blue-chip direct sales force. In comparison, Netsuite, another SaaS vendor who also recently filed their S-1, is operating at about 65% of revenue."

What's it all mean?  Who knows?  I'm not an investment banker, but 50M in losses on 65M in revenue makes me a little jumpy.   I'd also want to know over what time horizon the deferred revenue will come in, as recurring revenue makes the on-demand model sing.

Jason makes a cold war reference in his post, and I have to say it's relevant.  Reagan brought the whole thing down with his approach, and now there's one superpower, which was a pretty nifty trick.  The last time I saw a market share plan like this other than Reagan's cold war approach?  How about the sock puppet of pets.com?

SuccessFactors has a cool product and I hope they continue to make it happen.  But at least the pets.com reference let me throw up a jpeg of the sock puppet with an IPO reference....

UPDATE - Tom O'Brien fired back up his HRMS blog to talk about the SuccessFactors IPO, and he's not neutral....

UPDATE #2 - I've been contacted by two people I trust, who gave me a timeline to illustrate that reputation that remains of pets.com isn't necessarily fair.  While we think of the sock puppet and 1.2M 30 second Superbowl spots, the company was founded in fall of 1998 and folded in fall of 2000, actually returning money to shareholders rather than move forward after it became apparent that capital had dried up in the post dot com crash world.  See the Wikipedia summary for the best detail you can find on-line...

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