
Cash Flow and Destiny - mh_
http://bhorowitz.com/2013/10/08/cash-flow-and-destiny/
======
programminggeek
Cash means controlling your own destiny.

This is as important in your personal finances as it is in business. With
enough cash, you can decide for yourself what you want to do and when you want
to do it.

I call it buying my time, but in reality, you are buying your freedom to
choose. For both people and businesses, it is about getting to the point where
your income, assets, and liabilities are in line such that you have a safe
surplus.

If you look at the most successful companies or people, they tend to have a
significant reserve and that allows them to make choices. Without that
reserve, many choices go away. With no reserve, choice almost entirely
disappears.

If your goal is freedom, you need to buy that freedom.

~~~
ajtaylor
"If your goal is freedom, you need to buy that freedom." nailed it!

I couldn't agree more with you. The timing couldn't be better because I just
finished a spreadsheet for a new family budget. Once I got past the scary big
numbers, I realised that in a couple years we could be completely debt free.
The next thing that crossed my mind was what we could then be able to do:
save, travel more, be more selective in jobs, etc. When you have cash, you
have freedom.

~~~
jacquesm
The problem with that approach is that for most people their lifestyle is
adjusted upwards as they get closer to being debt free or having some money.
In the end this is a discipline problem, if you commit to some budget now and
stick to the plan for the next couple of years you'll be fine, beware of the
temptation to change your lifestyle when you reach your goal because it will
put you back where you started pretty quickly.

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bennyg
This is why it always feels funky to me for companies to raise money at
insanely large valuations. To me it should only be enough money to cover
expenses (employees, office space if necessary, business deals, salary for the
founders, r&d costs) for just long enough to where you can afford those things
without outside money after. For instance, if you do everything by the
business plan, and your business plan says you'll be profitable by the end of
the year, and that profitability is enough to cover the monthly costs plus
some - then don't raise after that year. You're good, right? This is why I
think it's good to sell something if you're a business, and not just give free
and then bank on ads or an exit later (which then means ads get placed on your
product, or it starts being for sale and some other company gets the money for
those sales).

Tell me I am or am not crazy in this philosophy.

~~~
sologoub
I think you are conflating two separate, but related issues: 1) Raising large
sums of money, when is it right? 2) Having a business model.

For the business model, yes, you should have one and you should put
considerable thought into it. You should always test it's validity given the
market at that moment in time or in the foreseeable future. That said, if you
are Twitter, you are affecting fundamental changes in communication and your
impact is evident on the societal level. At that level of impact, you have the
luxury and duty to take time to really work out the kinks from your business
model.

Now, if you are not Twitter, raising money during a bubble or looser years and
using it wisely could be the difference between life or death (or layoffs)
during not so good years.

Having money in the bank is powerful, whether you are putting it there or your
investors are. Just be careful not to have such a high burn rate that you
cannot hope to cover it with your own revenues should push come to shove.

------
JumpCrisscross
A 2009 study, "Why Do U.S. Firms Hold So Much More Cash than They Used To"
[1], investigated the doubling of U.S. cash-to-asset ratios between 1980 and
2006.

Similar to Ben, they find that "firms hold cash to better cope with adverse
shocks when access to capital markets is costly. Consistent with this
perspective, OPSW find that firms with riskier cash flows and poor access to
external capital hold more cash. The precautionary motive also suggests that
firms with better investment opportunities hold more cash because adverse
shocks and financial distress are more costly for them."

Tech moves quickly. This means tech firms are more (1) ephemeral and (2)
dependent on properly timing bold moves. (1) makes markets, and thus capital
availability, more jittery in the face of adverse information. (2) makes firms
less tolerant of aforementioned jitteriness. Hence Apple's $150 billion cash
balance.

[1]
[http://118.96.136.31/ejurnal/journal%20of%20finance%202009_v...](http://118.96.136.31/ejurnal/journal%20of%20finance%202009_vol%2064%20no5.pdf#page=6)
_Bates, Kahle and Stulz (2009)_

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gregpilling
"Happiness is positive cash flow" read the bumper sticker on the back of a
customers custom truck. It was twenty years ago, but the rules are still the
same. Positive cash flow puts you on a different footing than negative cash
flow. I have had to run my manufacturing business through both and the
positive years were much more fun.

The article also speaks of the headache of layoffs. Neither employees or
bosses like the experience, and managing of cash flow can help you avoid that.
Many people look at their P&L but ignore the Statement of Cash Flows. It can
be a fatal mistake to find out you have assets but no cash, and the walls come
crumbling in. Money coming in 90 days doesn't pay your bills today.

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acjohnson55
As so many things do, this reminds me of one of the more insightful books I've
ever read: [http://www.amazon.com/Doing-Capitalism-Innovation-Economy-
Sp...](http://www.amazon.com/Doing-Capitalism-Innovation-Economy-
Speculation/dp/1107031257)

Among many other things, the author, Bill Janeway, stresses that in his
decades of experience in the venture investment world the only reliable rule
he knows in that world is that cash and control are the only hedges against
the inherent uncertainty of new ventures.

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mifeng
I would flip this question around and ask: why should it be hard for a startup
to reach a cash flow positive state? We are lucky enough to live in a world
where the fixed costs of starting a technology company are virtually zero,
while the willingness for large enterprises to work with startups is at an
all-time high.

I'm a firm believer that a core team of smart, hungry engineers is all you
need to create a profitable, growing company today. Venture capital helps you
get there faster, but it shouldn't be a crutch.

------
icu
Thank you mh_10 for this great article.

It reminds me of the presentation that Sequoia Capital gave to its portfolio
company CEO’s back in Oct 2008 with the title "RIP Good Times" found here:
[http://www.scribd.com/doc/73886447/R-I-P-Good-
Times-10-7-08-...](http://www.scribd.com/doc/73886447/R-I-P-Good-
Times-10-7-08-Final)

At the time the slides were shocking to me and completely altered how I think
about building my start-up.

For starters the economic analysis at the start of the presentation made me
aware that 'best practice', aka what Sequoia Capital does, is to track and
analyse the wider macro and micro global economic forces. Since then I've
learnt a lot more about economics and I track key economic indicators.

The other takeaway was the the two slides titled "Survival" and "Survival of
the Quickest".

The "Survival" slide had the following bullet points:

* Must-Have Product * Established Revenue Model * Understanding of Market Uptake * Customer's Abilities to Pay * Assessment vs. Competitors * Cash is King * Need for Profitability

...which is pretty much the criteria I'm constantly assessing myself on.

And lastly the "Survival of the Quickest" side was making the point that
unless a massive cut in costs was made right at the beginning of the recession
your company would die in a Death Spiral. I can't stress how freaked out I was
when I saw that Death Spiral diagram.

I know those slides are 5 years old but even now for my own start-up I keep
those slides in the back of my mind as I pursue growth from my balance sheet
and keep my burn rate as low as I can.

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exo_duz
This whole idea of investors being able to dictate your work even though they
have no idea what you do is something that I loathe. I used to work in
Government and let me tell you the people in charge are most of the time the
most clueless about everything.

I suppose sometimes you have to suck it up to attain the finances but it's
still an issue that needs to be addressed as an investee.

Guy Kawasaki says it best about this "VC are not your friends so don't treat
them like one." [http://www.wamda.com/2013/10/guy-kawasaki-11-mistakes-
entrep...](http://www.wamda.com/2013/10/guy-kawasaki-11-mistakes-
entrepreneurs)

------
thomasd
There are actually many opinions to this.

Another supplementary reading to this has been covered by Mark Suster:
[http://www.bothsidesofthetable.com/2011/12/27/should-
startup...](http://www.bothsidesofthetable.com/2011/12/27/should-startups-
focus-on-profitability-or-not/)

In that article, Mark Suster cover a counter example where instead of pushing
to become profitable when revenue is almost overtaking cost, companies that
are in a fast growing market should consider forsaking profit today for higher
growth tomorrow.

Obviously, that depends entirely on the investment climate.

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kyro
Implied here are the feelings of obligation and the guilt that can come with
it that are often incredibly influential and stressful factors in the
decisions we make, whether it's obligation felt to an investor whose money
you're living off of or to a friend who stood up for you.

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badclient
What does this post mean for His portfolio companies? That VCs are sharks and
you should find a way to not need them asap?

A part of me really liked this post; another chuckles at the irony that his
own firm is famous for making some of the largest bets with the least proven
companies(ie. lyft).

~~~
ironchef
"What does this post mean for His portfolio companies? That VCs are sharks and
you should find a way to not need them asap?" I think it means that as an
entrepeneur in their portfolio, you need to understand your position on cash
flow...as you are beholden to not simply yourselves any more.

"another chuckles at the irony that his own firm is famous for making some of
the largest bets with the least proven companies(ie. lyft)." Sure..that fits
with Ben's (and Marc's) philosophy of investing. They like things that, on the
outside, look crazy. In general, they look at the team, the market, the
idea(s) <\- the s is important, and the business model. They realize that not
every original idea is what will actually be successful for that company. A
LOT of successful companies original intents were something different. Paypal
was a mobile to mobile payment system, GOOG was enterprisey search, etc.

I think the best hyperbolic quote about it is "We invest in college dropouts
with insane ideas going after tiny markets with no way to monetize". Will they
have misses? Absolutely, but from a macro perspective, they will have hits
that will far outweigh those misses (skype, nicira, etc.)

------
derwiki
The Kanye quotes made me laugh, as it seems the two have been hanging out
lately
([https://secure.flickr.com/photos/jeremycastillo/9499335800/](https://secure.flickr.com/photos/jeremycastillo/9499335800/))

