

"Any company with less than a year of cash in the bank is in the intensive care unit" - jkopelman
http://www.thedeal.com/techconfidential/vc-ratings/vc-ratings/alwayson-venture-summit-angels.php

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abstractbill
_The panelists named several market segments poised for growth: Search engines
powered by crowdsourcing..._

Really? Hasn't that been the "next big thing" for a few years now?

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Retric
I thought that was basically how yahoo started.

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nebula
And the companies that do have the cash in the bank, cross your fingers and
pray that your bank doesn't go bankrupt.

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Kaizyn
That's what FDIC insurance is for. You just probably need to have accounts in
a number of different banks to ensure you won't lose your money.

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ojbyrne
Jeff Clavier actually put on his blog that digg was built for $200. Since then
I file pretty well everything he says as "not credible."

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biohacker42
What if they are cash flow positive. Perhaps not exactly profitable but close
to it?

Do they still need a one year reserve?

What if they are profitable, what's a safe cushion then?

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nostrademons
If they are cash flow positive, then by definition they have more than a year
of cash in the bank. Their burn rate is negative, so they'll never exhaust
their cash supply.

(They should have contingency plans for a sudden drop in revenue though - if
you're barely cash flow positive and your customers drop out from under you,
you won't be cash flow positive for long. That's one reason I left my last
employer - they were profitable, but a major shakeout in the financial
industry could easily leave them without customers. Seem to be doing okay so
far, but I felt the risk was as great as leaving to start my own startup.)

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mseebach
I'd define a year of cash in the bank as the ability to keep living, even if
your inbound cash flow dries up. Obviously you can adjust the required amount
by how certain the income is. Income from a non-terminateable contract with a
solid business is "better" than 10.000 private users paying $5 by credit card
every month.

A private person who spend his entire salary every month (but no more) is cash
flow positive, but only if he keeps his job.

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nostrademons
"Income from a non-terminateable contract with a solid business is "better"
than 10.000 private users paying $5 by credit card every month."

From a financial security POV, I'd much prefer the 10,000 private users paying
$5/month, because of the law of large numbers.
<http://en.wikipedia.org/wiki/Law_of_large_numbers>

Say you have two companies. One has 3 customers with non-terminable contracts,
each of which pays you $1M/year. The other has 50,000 customers with at-will
contracts, each of which pays $5/month. Revenue is the same in both cases,
$3M/year. But if the first company loses _1_ customer, their revenue is
instantly down 33%. The second company would have to lose 17,333 customers to
be in similarly dire straits. Unless they're a blatant pyramid scheme (like
subprime mortgages or dot-coms), the chance of that is much less than the
chance of the first occurrence.

My perception may be colored by dealing with hedge funds, though. Hedge funds
tend to "blow up" instead of reducing spending - you rarely have to worry
about them stopping usage of your product, but you have to worry about them
going out of business entirely. If it were 3 irrevocable contracts with GE,
Wells Fargo, and Coca-Cola, I'd be much less worried.

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Shamiq
If I can get a clarification, how well does the law of large numbers apply to
a non-random sample?

In other words, 10k paying users are self-selected into the service, which
would include biases in measurements. Thus, depending on the variation of the
user population, it could theretically be possile for small stimuli having
large effect to a user base. If the users are similar, but are part of a
niche, if that niche gets hit, the business could be wiped out.

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nostrademons
It doesn't. If your sample is non-random, it's quite possible for you to lose
your 17,333 users in short order, if some external force acts upon them all.

That's basically what happened with the subprime crisis - a lot of supposedly
"independent" homeowners all defaulted at once, which played havoc on the
computer models for valuing CDOs. They all had the unknown common factor that
the loans were based on permanent home appreciation, and so couldn't be
sustained on income alone. So when house prices started declining, bye-bye
subprime loans.

How secure this makes your customers depends on why they're choosing your
service. It's very unlikely that 37signals or FogBugz would lose all their
customers at once (unless a great new competitor sprung up), because they're
all separate, independent businesses with their own reasons for purchasing the
product. It's fairly likely that Twitter or FaceBook could lose all their
customers, _if_ there was some reason for an exodus to start, because most of
their users are only on the service because their friends are.

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prakash
Josh, what are your thoughts on this?

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sabat
Blogga please. No one knows how the next year will pan out. Can we have a
moratorium on blanket statements?

