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Games people play with cash flow

389 点作者 kalonis超过 4 年前

40 条评论

nickreese超过 4 年前
Most useful article I&#x27;ve read probably this year.<p>After selling our last company I was surprised that the acquirer went on an even bigger spending spree just months after acquiring us. As a bootstrapper this blew my mind.<p>This article helps shine a light on how they pulled it off. They acquired us for the free cashflow the company threw off (uncommon in our industry) and the leveraged that to further their expansion.<p>I&#x27;ve always looked at accounting as &quot;backwards facing&quot; (meaning it looks at what has happened vs where a company is going) but this article has changed my perspective dramatically.
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ihatethissite超过 4 年前
The author creates a false dichotomy when they write that business is either about making profit or managing cash flow.<p>Making a profit requires cash flow management, but managing cash flow does not require making a profit. This article does talk about managing cash flows in a way that involves never making a profit.<p>First, and tangentially, it&#x27;s interesting that real estate developers do this all the time.<p>Second, it&#x27;s interesting that this article shows not only why cable companies regional monopolies are extant, but also that their continued existence relies on the preservation of those monopolies.<p>These and other companies that rely on a strategy of unfettered subscriber growth, in this case leveraged as a marketing tool to creditors to acquire additional debt, is no different than a Ponzi scheme. It makes the fatal assumption that subscriber growth can continue ad infinitum.<p>But, similar to the amount of free energy in a system, the number of potential subscribers remaining is finite. Eventually, cash flows will fail to meet the projections sold to creditors and established as assumptions in their financial models.<p>Thus arises a situation that remains tenable only as long as subscribers remain subscribed for as long as is required to service the debt outstanding at the time the growth stopped. Because the debt didn&#x27;t go anywhere. It hasn&#x27;t disappeared. Today that debt is sitting on the balance sheet of every one of America&#x27;s cable providers: the direct result of a flawed line of thinking promoted by the author.<p>Consider the implications. To remove the regional monopolies of the cable companies is to not only destroy their subscriber base, and thus their cash flows, but also the cash flows promised to their legion creditors. Every one of these creditors now has a vested interest in the preservation of those monopolies, having themselves extended and received credit based on said promises of payment.<p>I propose that, contrary to the statements of the author, the proof presented by their friend is not &quot;framed incorrectly&quot;. Rather, it shows something the author doesn&#x27;t wish to see.
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bob33212超过 4 年前
Great Article. A lot of people don&#x27;t understand how important cash flow is. Even Elon pointed out that having factories close to customer is very important for a fast growing company like TSLA because if you grow too fast you&#x27;ll be putting so many cars on boats before they are paid for that you will have no cash.<p>I disagree with the framing of both articles somewhat. The question should be &quot;What is limiting your growth?&quot; Is raising money going to distract you from making a product customers need and love? Then skip it. If being too small for enterprises to take you seriously is a blocker then you&#x27;ll need to raise money.
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jpm_sd超过 4 年前
This is a pretty good article but missed an opportunity to comment in more detail on the 2020 startup&#x2F;unicorn ecosystem.<p>&quot;Malone’s entire strategy was built around a single fact: that you have to pay up front for cable systems, but then earn back your money via a stable stream of cash for years and years afterwards. Notice how this extreme demand for capital drove Malone to embrace debt, over other sources of capital. Now notice how closely this resembles the Software as a Service (SaaS) business model, which is the primary business model in today’s startup world.&quot;<p>Gotta spend money to make money. But I wish he had commented further on businesses that do this incorrectly, based on wishful thinking. He talks about the strengths of TCI, with an engineered &quot;loss&quot; that saves them money on taxes, or Amazon, whose decades of &quot;unprofitability&quot; helped them to build a long-term-profitable empire.<p>But what about Uber or DoorDash? Burning investor cash, chasing long-term revenue that will never come? How on Earth are they keeping this scam going? Why do people believe in it?
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tunesmith超过 4 年前
I think the argument he&#x27;s knocking down is more flawed than he&#x27;s letting on - specifically, just because the extra cash makes it <i>easier</i> to make bad decisions doesn&#x27;t mean that those bad decisions will be made. The argument treats those as inexorable. If the argument had been passed through a truth checker and given a few more eyeballs, that flaw would have been obvious. That particular inner syllogism just doesn&#x27;t inexorably flow from the truth of its lemmas.<p>More generally, the &quot;flaw with first-principles analysis&quot; is generally as you&#x27;d expect. Your premises might appear true when they&#x27;re not, or your inner reasoning structure might appear valid (logical definition) when it&#x27;s not, or you might be making assumptions (in the omission of other premises) that are false. It&#x27;s just really <i>hard</i>. So that&#x27;s where a slow painstaking process of repeated review will help you. And it&#x27;s also not a panacea - first-principles analysis does not guarantee your solution, it&#x27;s more a process that helps you surface your assumptions and learn your argument.
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munificent超过 4 年前
There&#x27;s a simpler failure mode to pay attention to that the author gets close to but doesn&#x27;t notice. The original claim is &quot;Companies should not raise capital.&quot; Any time you see a &quot;should&quot; claim, try adding this to the end: &quot;, and should instead do <i>X</i>.&quot;<p>Now, when evaluating the pros and cons of the &quot;should not&quot; half, you have an actual relevant benchmark to compare to. It doesn&#x27;t matter how awful an idea it is to raise capital in some absolute terms. What actually matters is whether it&#x27;s worse than what you&#x27;d have to do <i>instead.</i><p>Almost all decisions are about choosing one from several options, so if you find yourself making an absolute evaluation, that&#x27;s a sort of &quot;decision smell&quot; that you should instead be doing a comparative analysis.
highfrequency超过 4 年前
Could someone explain the core example about prepaying restaurant vendors?<p><i>(Kokonas again): That’s what I said! I went, “I’ll pay you $20 if you tell me why.” And he said, “Well, it’s very simple. I have to slaughter the cows, then I put the beef to dry. For the first 35 days I can sell it. After 35 days there’s only a handful of places that would buy it, after 60 days, I sell it $1 a pound for dog food.” So his waste on the slaughter, and these animals’s lives, and the ethics of all of that, are because of net-120! Seems like someone should have figured this out! As soon as he said that, everything clicked, and I went “We need to call every one of our vendors, every time, and say that we will prepay them.”</i><p>It seems like the value to the beef vendor is not from actually receiving the cash flow earlier, but rather from just knowing the order quantity in advance to optimize inventory.
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PKop超过 4 年前
The linked article &quot;How First Principles Thinking Fails&quot; [0] , which states<p>&quot;..But I think there&#x27;s a more pernicious form of failure, which occurs when you reason from the <i>wrong set of true principles.</i> It is pernicious because you can’t easily detect the flaws in your reasoning. It is pernicious because all of your base axioms are true...In other words, the only real test you have is against reality. Your conclusion should be useful. It should produce effective action.&quot;<p>reminds me of the quote by Eric Zemmour:<p>&quot;When principles are in contradiction with society’s survival then the principles are false, for society is the supreme truth.&quot; [1]<p>[0] <a href="https:&#x2F;&#x2F;commoncog.com&#x2F;blog&#x2F;how-first-principles-thinking-fails&#x2F;" rel="nofollow">https:&#x2F;&#x2F;commoncog.com&#x2F;blog&#x2F;how-first-principles-thinking-fai...</a><p>[1] <a href="https:&#x2F;&#x2F;www.theamericanconservative.com&#x2F;dreher&#x2F;eric-zemmour-blockbuster-speech&#x2F;" rel="nofollow">https:&#x2F;&#x2F;www.theamericanconservative.com&#x2F;dreher&#x2F;eric-zemmour-...</a>
dissidents超过 4 年前
I am unconvinced that &quot;first-principles thinking&quot; is the problem here. Surely one can refute the original argument without having to debunk axiomatic logic itself.<p>For example, one could argue something like this: Even though increased access to other people&#x27;s money can cause founders to make irresponsible decisions, raising money has other advantages that tend to offset this.
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impostervt超过 4 年前
The bit about TCI (a cable company with a lot of debt in the 70s) is super interesting. I&#x27;ve read before about how companies don&#x27;t always see debt as a bad thing, and how they can move money around, but it always seems like magic. From the article - &quot;And indeed, Malone’s strategy required TCI to show a loss for pretty much forever; for the next 25 years, it was never in the black&quot;. As the article mentions, Amazon followed a similar strategy for a long time.<p>It reminds me of a quote by the WWI French field marshal Foch - &quot;My center is giving way, my right is retreating, situation excellent, I am attacking.&quot;
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sna1l超过 4 年前
This article is great and actually comes to one of the core tenets from the book &quot;The Outsiders.&quot;<p>If you had to choose a single core task for the CEO of a company, it is to create free cash flow and decide best how to spend it, aka capital allocation.<p>Book Source: <a href="https:&#x2F;&#x2F;smile.amazon.com&#x2F;Outsiders-Unconventional-Radically-Rational-Blueprint&#x2F;dp&#x2F;1422162672&#x2F;ref=smi_www_rco2_go_smi_4368549507?_encoding=UTF8&amp;%2AVersion%2A=1&amp;%2Aentries%2A=0&amp;ie=UTF8" rel="nofollow">https:&#x2F;&#x2F;smile.amazon.com&#x2F;Outsiders-Unconventional-Radically-...</a>
jplr8922超过 4 年前
The article is very good, but to me it is normal finance. Many points raised by the author are discussed in undergraduate business classrooms every year. Very good application of existing theory.<p><a href="https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Modigliani%E2%80%93Miller_theorem" rel="nofollow">https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Modigliani%E2%80%93Miller_theo...</a>
fghorow超过 4 年前
As a working scientist, I read the OP with great interest (no pun intended).<p>In essence from my perspective, the axiomatic approach is like &quot;theory&quot; and the operational approach is like &quot;experiment&quot; or &quot;observation&quot; in the sciences.<p>There&#x27;s a very good reason why experiment&#x2F;observation trumps theory in the scientific method.
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dade_超过 4 年前
Don&#x27;t raise money with equity is the message in the blog post he referred to. Equity is expensive and these days, debt is cheap.<p>Know your WACC. <a href="https:&#x2F;&#x2F;www.investopedia.com&#x2F;terms&#x2F;w&#x2F;wacc.asp" rel="nofollow">https:&#x2F;&#x2F;www.investopedia.com&#x2F;terms&#x2F;w&#x2F;wacc.asp</a>
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YuccaGloriosa超过 4 年前
Just some thoughts.<p>TCI wasn&#x27;t a startup. So it can&#x27;t be compared to 2020 startups in this way. Because...you are starting the comparison at a different point in the companies life.<p>This is comparing markets almost 50 years apart. Motives and reasoning just aren&#x27;t what they used to be.<p>TCI had assets to borrow against. TCI had a monopoly in their areas, and existing customer base. They gamed the tax system for profit. They weren&#x27;t looking for over valuations from Wall Street with a view to selling out for the $$$<p>Ok I&#x27;m bored now
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burnte超过 4 年前
The proposition can be disproved very early in the chain of logic, actually.<p>1. Startups are risky.<p>True.<p>2. Raising capital to do a startup reduces skin in the game (you’re spending other people’s money, after all).<p>Arguable, but not a given. Raising capital does not eliminate risk, especially if one has their own money in it, and&#x2F;or are using it as a job. Just because someone else invested doesn&#x27;t necessarily reduce my incentive. I lose money, time, face, and opportunity with or without investment.<p>3. Once you have less skin in the game, it is easier to make bad decisions. The author argues this is due to a) having a capital buffer to cushion you, and b) having more time to waste.<p>100% false. It is no easier or harder to make bad decisions with outside money. It is ALWAYS easy to make bad decisions, having more money simply makes it easier to make costlier bad decisions faster. Buying real estate in late 2006 was a bad idea regardless of whose money you used. If anything, having that outside money means you have people to be accountable to, people to run decisions by, and thus it&#x27;s HARDER to make a bad decision.
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konschubert超过 4 年前
The logical fallacy in the original post discussed is simply here:<p>&gt; Therefore: startups shouldn’t raise money.<p>The therefore doesn&#x27;t apply. The original post makes a good argument that there is a certain detriment to raising money. But he doesn&#x27;t actually proof that this detriment outweighs the benefits of raising money.
wyiske超过 4 年前
I used to be afraid of debt, but understood this principle ever since an accounting friend told me about a luxury cruise liner he worked for. It was started buy an immigrant, and quite successful (pre Covid). I was confused how anyone could launch a cruise company when the cost to buy (or even lease a cruise liner) must be 100s of millions. When I asked my friend about their debt, he said “don’t worry, they’re doing just fine”. It was at that point I realised it’s not the debt that matters, but the rate (time wise) at which you can repay it, i.e., debt itself is fine so long as you have sufficient cash flow, and debt can be cheap.<p>Unfortunately I’m just a software engineer, who has never been able to put this in practice.
peterwoerner超过 4 年前
There is an important point about reasoning here which is worth stating explicitly. You can reason perfectly about the things you have thought of and know, but they things you didn&#x27;t think of and don&#x27;t know might still change the correct answer.
chris_wot超过 4 年前
<i>Once you have less skin in the game, it is easier to make bad decisions.</i><p>Surely that is a proposition that might not be entirely correct?
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pmayrgundter超过 4 年前
A related study I did. This sheet compares cash flow for Build to Order (BTO) vs Build to Stock (BTS) for a very popular widget sold at $100. BTO is not sensitive to Cost of Goods Sold (COGS); BTS is.<p>If, for example, your COGS approaches half your unit price and you use BTS, you&#x27;ll have almost no chance of getting your business off the ground. But with BTO your cash flow explodes.<p><a href="https:&#x2F;&#x2F;docs.google.com&#x2F;spreadsheets&#x2F;d&#x2F;15JZyPEYJxNHEWTPFmxOIoWmo6XS_WXRLGC-csZLhlVM&#x2F;edit#gid=0" rel="nofollow">https:&#x2F;&#x2F;docs.google.com&#x2F;spreadsheets&#x2F;d&#x2F;15JZyPEYJxNHEWTPFmxOI...</a>
syntaxing超过 4 年前
Wow what a great read. The other article about where first principles fails [1] is absolutely amazing as well. The debate about experience vs first principle is a heavily recurring theme in the tech industry. I couldn’t structure my thoughts about it in words and the article perfectly sums it up in a succinct manner.<p>[1] <a href="https:&#x2F;&#x2F;commoncog.com&#x2F;blog&#x2F;how-first-principles-thinking-fails&#x2F;" rel="nofollow">https:&#x2F;&#x2F;commoncog.com&#x2F;blog&#x2F;how-first-principles-thinking-fai...</a>
nraynaud超过 4 年前
Funny, I had a boss do the converse. We were a very young company with zero customer, and we had a small net 30 bill to pay. The boss said: I have to put a reminder to pay it. Well, without any hope of earning money in the mean time, there is no point in trying to optimize the cash flow pay now and be done with it. Free your brain and don’t adopt complex behavior if the reason is not here.
mrfredward超过 4 年前
This post is making an error, or at least a poor choice in terminology, when thinking profit only means GAAP accounting or taxable profit.<p>Malone cut costs by reducing tax liability, getting better prices on programming, and increasing the subscriber base (revenue). What&#x27;s that word for revenue minus expenses again?<p>A more honest explanation: Accounting depreciation != the actual change in value of things, and the cash flow statement can let you know when GAAP accounting isn&#x27;t giving an accurate picture of success.<p>And about Malone&#x27;s insight on leverage: Leverage ups your return on investment (when things don&#x27;t blow up). Paying interest doesn&#x27;t help you hide money from the tax man any better than setting dollar bills on fire would, but leverage can make big things happen from small amounts of investment.
simonebrunozzi超过 4 年前
&gt; But those who actually run businesses know that running a business is all about managing cash flows.<p>This is the golden line. The richest person on Earth (Jeff Bezos) followed this principle religiously since Amazon&#x27;s inception (or should I say, Cadabra&#x27;s inception?).
bluejellybean超过 4 年前
If you liked this article and want to learn more about the games played in corporate finance, I would strongly recommend a book a colleague of mine recommended, &quot;The Quest For Value&quot;. This single book had completely changed my view of the business world more than any other, and it gives one a much clearer understanding of the massive debt load that the United States operates under. I grew up and lived through the 08 financial crisis, losing a home in the process, and hated debt of any sort. Now that I&#x27;ve read this book cover to cover multiple times, my view has completely shifted, and my understanding of stock valuation and cash flow analysis has done nothing but improved.
supercanuck超过 4 年前
The author is describing the time value of money <a href="https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Time_value_of_money" rel="nofollow">https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Time_value_of_money</a><p>The reason to to take the money now from venture is because it is more valuable now than it is later. The way this author is describing this though reminds me of the folksy, whimsical way some business books are written which makes this article so applealing: e.g. The Goal, How to Win friends and influence people, etc.
BonnieBrown超过 4 年前
Like many others in this thread I thought this was an incredibly well written and elucidating article.<p>I just happened to be trying to learn more about David Friedberg before stumbling upon this article and I watched this lecture he gave on entrepreneurism which I think complements the contents of this article incredibly well. Highly recommend for those looking to learn more<p><a href="https:&#x2F;&#x2F;youtu.be&#x2F;m2sj-U2QSHs" rel="nofollow">https:&#x2F;&#x2F;youtu.be&#x2F;m2sj-U2QSHs</a>
anonymousDan超过 4 年前
Had to stop reading, could the author be any more pretentious? The obvious flaw in the reasoning is step 3, having more capital results in you making worse decisions. Uhm, no, having more capital can also give you more options, allowing you to make potentially better decisions sooner.
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monkeydust超过 4 年前
Nice piece. If you have the basis of a business that can prove strong cash flow then you should definatley look at financing with debt over equity. In startup land its not really the done thing but in this long term low rate environment I suspect thst might change.
root-z超过 4 年前
echoing the common opinion, this is a great article at both practical and theoretical levels. The discussion on cash flow is insightful but the summary about the flaws of first principle thinking is what makes it complete.
solatic超过 4 年前
Great article. One thing that it made me think about - instant payment clearing will have an enormous impact on cash flow, and thus on the wider economy, if the US can ever get it together and finally deprecate ACH.
SerLava超过 4 年前
Oh man, the conclusion doesn&#x27;t even follow from the argument, and it&#x27;s pretty obvious on its face.<p>The only correct conclusion from those axioms is:<p><i>There are advantages to not raising money.</i>
zuhayeer超过 4 年前
What I got out of this is that you shouldn&#x27;t deal in absolutes. There are ways to successfully create businesses with <i>and</i> without outside capital.
tuatoru超过 4 年前
I think the article is itself an example of broadly correct but for the wrong reason.<p>the problem with the argument from first principles that the article attempts to refute, is that the &quot;first principles&quot; given carry an implicit assumption that the minimum viable product is a a null product.<p>If in reality the mvp or, later, the infrastructure for growth take more to create than the resources you command, you need to raise capital.<p>The &quot;first principles&quot; also ignore time to market and competitive pressures. They are more &quot;spherical cow on a frictionless plane&quot; principles than actually useful ones.
2Gkashmiri超过 4 年前
I have a question. Interest payments. Unless you have a high enough revenue stream to cover the cost of interest, arent you eroding your capital ?
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JackFr超过 4 年前
There are three excellent blog posts here, but mashing them together does not a coherent argument make.
knighthack超过 4 年前
That was an amazing article. Especially the breakdown on raising capital from first principles.
blackrock超过 4 年前
This may be true for small lifestyle type businesses.<p>But some problems can only be solved with VC money. Because of time limitations.<p>You may only have a small window of opportunity to capture a certain market.<p>If you grew linearly, and built up product idea A, in order to fund product idea B, in order to fund product idea C, then by the time you’re done with product idea B, a decade may have passed by. You’ve also grown older, and may not have the energy of your younger self anymore.<p>Also, a competitor, one with a larger funding pool, may have jumped in and captured that market, right in front of you.
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TameAntelope超过 4 年前
Maybe a basic question, but is cash flow a concrete expression of the time value of money, a concept taught (abstractly) in intro econ courses?<p>I didn’t understand the value of either until this article, but they seem related.