Cash Flow and Destiny(bhorowitz.com)
bhorowitz.com
Cash Flow and Destiny
http://bhorowitz.com/2013/10/08/cash-flow-and-destiny/
31 comments
I'm surprised this post received relatively few votes and discussion vs. the value I see in its message. Anecdotally, in addition to hiring and keeping top people this is the only other thing I've been able to identify that successful founders whom I know, do very well.
This has been my focus for the last two years, both personally and in business. It's paying dividends in both.
This, among others, gives me the impression that among VCs A16Z is the Founder's VC. The drive for profits and ruling by the numbers (favoured by accountants and investors) seems to be tempered by a very real grip and understanding of the reality a founder and their team faces.
You must have the ability to make decisions; cash is king.
This has been my focus for the last two years, both personally and in business. It's paying dividends in both.
This, among others, gives me the impression that among VCs A16Z is the Founder's VC. The drive for profits and ruling by the numbers (favoured by accountants and investors) seems to be tempered by a very real grip and understanding of the reality a founder and their team faces.
You must have the ability to make decisions; cash is king.
"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.
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.
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.
While I agree with this statement in general, it is a bit of a tautology - do cash reserves come from success, or cause it?
I agree that cash reserves help, but I think it's hard to ascertain how big a driver of success it is, given that it is also the result of success.
I agree that cash reserves help, but I think it's hard to ascertain how big a driver of success it is, given that it is also the result of success.
The "trick" is to get generating as soon as possible. Even moderate revenue matters - not only because moderate expenses have to be paid, but because "generating revenue" as a mindset needs to be cultivated and honed. It's an ethic that few have truly mastered, and one that truly defines an entrepreneur. Generate revenue as a habit.
Yes, there's a balance to be had between doing things that generate revenue now and doing things that matter in the longer run ... but guess what ... that is exactly the nature of every business out there. From the biggest multinationals to the smallest corner shop - they're all balancing between generating shorter term revenues with longer term growth.
If you are spending time only doing long run ("strategic") stuff, you are not a business. The funny thing is, the opposite is not true: i.e. if you're only generating revenue but have little to show for long term direction.
Yes, there's a balance to be had between doing things that generate revenue now and doing things that matter in the longer run ... but guess what ... that is exactly the nature of every business out there. From the biggest multinationals to the smallest corner shop - they're all balancing between generating shorter term revenues with longer term growth.
If you are spending time only doing long run ("strategic") stuff, you are not a business. The funny thing is, the opposite is not true: i.e. if you're only generating revenue but have little to show for long term direction.
Oh yes. We do live in slavery. Money is the only key to our chains.
is money the key, or is money the chain that binds us? The only good that comes out of this is that you get to decide which of these worldviews you want to live in, then make the best of it.
Both. This is not some metaphysical bullshit:
- If you have more money (wealth, the key), you are freer, because you don't have to earn a wage for longer (with enough money, you are retired and don't ever have to earn a wage again.)
- If you have lower costs (lifestyle, the chains), you are freer, because any wage you earn can be lower, and you have more spare money to put towards your wealth.
You don't need to chose between being a wage-slave or a hippy. Investing a good fraction (say 10-80%) of your income is something most middle-class westerners can afford, attacks both ends of the problem, and leads reliably to freedom.
- If you have more money (wealth, the key), you are freer, because you don't have to earn a wage for longer (with enough money, you are retired and don't ever have to earn a wage again.)
- If you have lower costs (lifestyle, the chains), you are freer, because any wage you earn can be lower, and you have more spare money to put towards your wealth.
You don't need to chose between being a wage-slave or a hippy. Investing a good fraction (say 10-80%) of your income is something most middle-class westerners can afford, attacks both ends of the problem, and leads reliably to freedom.
> Investing a good fraction (say 10-80%) of your income is something most middle-class westerners can afford
What in the world? Investing 80% of your income will leave you substantially in arrears with the IRS.
What in the world? Investing 80% of your income will leave you substantially in arrears with the IRS.
After-tax income then. Or you move to Singapore.
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.
Tell me I am or am not crazy in this philosophy.
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.
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.
Joel Spolsky had an excellent post on the two models, Ben and Jerry's vs Amazon, and when each is appropriate:
http://www.joelonsoftware.com/articles/fog0000000056.html
http://www.joelonsoftware.com/articles/fog0000000056.html
I totally agree with you :) but I'm going to play devil's advocate and tell you why I think "those" companies do it that way.
1. Getting tons of money helps the company grow/scale much faster, and gives them money to market and sell their product
2. Getting a crazy high valuation lets them get that money in #1 from investors without diluting ownership.
3. The valuation in #2 means that in case of an exit (M&A or IPO), the investors get the most returns from their investment.
So while it all obviously points at a self-created bubble, it seems to me that all the parties (founders, company, investors) want to do this to grow/exit fastest.
1. Getting tons of money helps the company grow/scale much faster, and gives them money to market and sell their product
2. Getting a crazy high valuation lets them get that money in #1 from investors without diluting ownership.
3. The valuation in #2 means that in case of an exit (M&A or IPO), the investors get the most returns from their investment.
So while it all obviously points at a self-created bubble, it seems to me that all the parties (founders, company, investors) want to do this to grow/exit fastest.
Often yes, but "To me it should only be enough money to cover... for just long enough to where you can afford those things without outside money after" assumes you know what is long enough. If you raise money, raise enough that you have some time/room to figure it out, and make sure.
On a related note: Raising money at insanely large valuations sounds sexy and exciting, but can lead to serious problems down the road. The expectation with any VC-backed startup is for the proverbial valuation pie to expand after each round of funding. If the pie is already spilling over the sides of the pan after the A round, then the company is almost certainly destined for a down B round unless they can grow massively. That typically smells of desperation and failure, or a rotten pie, to continue the analogy. Damn, pie sounds really good now at 1:15am.
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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... Bates, Kahle and Stulz (2009)
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... Bates, Kahle and Stulz (2009)
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"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.
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.
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...
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.
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.
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.
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.
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-...
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.
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-...
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.
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...
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...
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...
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.
Another supplementary reading to this has been covered by Mark Suster: http://www.bothsidesofthetable.com/2011/12/27/should-startup...
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.
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.
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).
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).
"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.)
"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.)
The Kanye quotes made me laugh, as it seems the two have been hanging out lately (https://secure.flickr.com/photos/jeremycastillo/9499335800/)
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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.