Cash means controlling your own destiny.<p>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.<p>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.<p>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.<p>If your goal is freedom, you need to buy that freedom.
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).<p>Tell me I am or am not crazy in this philosophy.
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.<p>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."<p>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.<p>[1] <a href="http://118.96.136.31/ejurnal/journal%20of%20finance%202009_vol%2064%20no5.pdf#page=6" rel="nofollow">http://118.96.136.31/ejurnal/journal%20of%20finance%202009_v...</a> <i>Bates, Kahle and Stulz (2009)</i>
"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.<p>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: <a href="http://www.amazon.com/Doing-Capitalism-Innovation-Economy-Speculation/dp/1107031257" rel="nofollow">http://www.amazon.com/Doing-Capitalism-Innovation-Economy-Sp...</a><p>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.<p>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.<p>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: <a href="http://www.scribd.com/doc/73886447/R-I-P-Good-Times-10-7-08-Final" rel="nofollow">http://www.scribd.com/doc/73886447/R-I-P-Good-Times-10-7-08-...</a><p>At the time the slides were shocking to me and completely altered how I think about building my start-up.<p>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.<p>The other takeaway was the the two slides titled "Survival" and "Survival of the Quickest".<p>The "Survival" slide had the following bullet points:<p>* Must-Have Product
* Established Revenue Model
* Understanding of Market Uptake
* Customer's Abilities to Pay
* Assessment vs. Competitors
* Cash is King
* Need for Profitability<p>...which is pretty much the criteria I'm constantly assessing myself on.<p>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.<p>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.<p>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.<p>Guy Kawasaki says it best about this "VC are not your friends so don't treat them like one."
<a href="http://www.wamda.com/2013/10/guy-kawasaki-11-mistakes-entrepreneurs" rel="nofollow">http://www.wamda.com/2013/10/guy-kawasaki-11-mistakes-entrep...</a>
There are actually many opinions to this.<p>Another supplementary reading to this has been covered by Mark Suster: <a href="http://www.bothsidesofthetable.com/2011/12/27/should-startups-focus-on-profitability-or-not/" rel="nofollow">http://www.bothsidesofthetable.com/2011/12/27/should-startup...</a><p>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.<p>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?<p>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).
The Kanye quotes made me laugh, as it seems the two have been hanging out lately (<a href="https://secure.flickr.com/photos/jeremycastillo/9499335800/" rel="nofollow">https://secure.flickr.com/photos/jeremycastillo/9499335800/</a>)