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Games People Play with Cash Flow (2020)

commoncog.com

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Re: Games People Play with Cash Flow (2020)

#21

Post by graemep »

There are a few very strange, almost unbelievable, things said about people's understanding of the issues.

I can understand that startups and small business may not understand that value comes from cash flow not profits. The value of an asset is the value of the discounted cash flow. This is very basic to the theory finance, so how come banks and wall street did not know it? There has to be more to this.

just being an institutional investor looking at selling at a profit as soon as possible.

The stuff about payment terms, speed and pre-payments is standard good cash flow management. Did these people have no professional advisors explain this?

This is literally business textbook stuff. I have the textbooks (even the MBA ones, which are a bit more basic cover it all in the first few chapters).

The British supermarket chain Kwik Save financed its growth (in the 1970s) by getting long payment terms and selling for cash, and they were imitating the strategy of similar businesses in the US. This is not new.

I read the Bezos quote as primarily talking about long term vs short term, not cash flow vs profit measures. I am sure he understands both issues given his background in banking and investment, but here he is really talking about looking at the long term. It makes sense given he owned a large chunk of the business he intended to hold, rather than being focused on next year's find manager league tables.

Re: Games People Play with Cash Flow (2020)

#23

Post by fragmede »

EGreg wrote: post #15
fragmede wrote: post #10

Earlier quoted context omitted.

Given that Wistia, MailChimp, Patagonia, and GitHub, among others did the seed/series A, profitability thing you suggest, there are other mechanics at play here. Specifically, as the article raises, profitability as in net revenue isn't everything. edit: swapped Basecamp for Wistia, because Basecamp did not take VC money.

Basecamp took no VC money (Except for Bezos Expeditions many years into it)

you're right! edited.

Re: Games People Play with Cash Flow (2020)

#24

Post by jasode »

EGreg wrote: post #3
bruce511 wrote: post #2

>> If you start from a wrong set of axioms, you would eventually end up with a flawed conclusion. While cash flow comes into it, I think the primary axiom which is different (between VC and bootstrap) is the definition of success. A bootstrap company is successful if it makes a profit, and remains in business. Some growth is nice, but there are plenty of one-man / familiy businesses to show that growth is not require…

I never understood, what is to prevent a startup from raising a VC seed round, then a series A round, and then simply grow at its own pace? Is there something in the SAFE note or whatever, that says the startup MUST fail fast, go big or go home? It can grow methodically, can't it? The closest explanation I've ever heard is that VCs do "signaling" in future rounds... but listen, if you have a few extra million dollars…

>I never understood, what is to prevent a startup from raising a VC seed round, then a series A round, and then simply grow at its own pace? Is there something in the SAFE note or whatever,

You're looking for something in legal paperwork with Terms & Covenants that for some reason is unstated in public discussions.

The real underlying reason your idea of "just take the VCs money and do the opposite of what the investors want" isn't common is that it goes against the founders' personal integrity of doing business honestly. This means the founders not lying to VCs when they make presentations with the reasons for raising capital. I.e. the founders forecast TAM Total Addressable Market for revenue, forecast costs for servers and employees, explain their ambitions for growth, etc. The type of founders trying to get in front of VCs to convince them to fund their startup are supposed to be a self-selected set entrepreneurs who inherently want to grow fast and don't need VCs telling them to do so. If honest business dealing is the premise, then there's no need to "trick" the VCs into wiring them millions into the startup's bank account and then tell them "oops, I lied in my presentations and now that I have your money, I just want to grow slow at my own pace."

Your question can also be modified to ask about a VC fund's intentions: "Why can't a VC fund raise money from LP (Limited Partners) and then just live off the guaranteed 2% management fee instead of taking risky investments and possibly losing money?" -- What stops VCs from doing that is the venture capitalist's personal integrity when asking the LP for money.

With that said, there can be a difference in legal mechanisms between an angel/seed round with no board seat taken by a VC -vs- Series A with a VC on the board. At later stages, the board can outvote the founders and/or fire them.

Re: Games People Play with Cash Flow (2020)

#25

Post by roenxi »

In this case the argument is flawed because it is too loose in defining a bunch of words and premises. Eg, you can't argue about "bad decisions" because in this case it is a meaningless term. With the frame in the argument it likely isn't correct to say that "once you have less skin in the game, it is easier to make bad decisions". You are still empowered to make the best decisions you can, having less skin in the game doesn't change that.

The skin-in-game principle is a pithy way of talking about principle-agent risks. That is to say, it is a problem for the people fronting the money, not the people on the receiving end. The people on the receiving end are strictly better off (ignoring that they're going to have to trade away control to get the money, obviously - they have strictly more options in the short term). And the people giving the money will still invest despite that, because they need to take risks to earn money - their strategy is to take risks to earn a premium, so they're looking for sensible risks to take.

Re: Games People Play with Cash Flow (2020)

#26

Post by devjab »

ftlio wrote: post #6

Great read, especially from the perspective of just trying to understand why people overfit certain thinking to certain problems. My startups perspective: I think it’s hard for people to understand the subtlety from all the memes and hearsay. We hear that you need to talk to your users to understand what to build, but I’ve seen this fall flat on its face and lead to extreme confusion, several times now, when you’re n…

I think you should be asking about their work, and try to understand their business processes rather than what they want from your software. Then you can spot their pain points and develop features for those. I know this is easier when you’re an internal developer, but the best way we have to spot important features (and the removal of some) is to simply spend a week in the shoes of an employee using the software. Everything which annoys you, annoys your users.

Re: Games People Play with Cash Flow (2020)

#27

Post by ragebol »

devjab wrote: post #26
ftlio wrote: post #6

Great read, especially from the perspective of just trying to understand why people overfit certain thinking to certain problems. My startups perspective: I think it’s hard for people to understand the subtlety from all the memes and hearsay. We hear that you need to talk to your users to understand what to build, but I’ve seen this fall flat on its face and lead to extreme confusion, several times now, when you’re n…

I think you should be asking about their work, and try to understand their business processes rather than what they want from your software. Then you can spot their pain points and develop features for those. I know this is easier when you’re an internal developer, but the best way we have to spot important features (and the removal of some) is to simply spend a week in the shoes of an employee using the software. Ev…

But be sure to ask why business processes are the way they are.

If you can eliminate a process all together, I'd be a happy customer.

Re: Games People Play with Cash Flow (2020)

#28

Post by rented_mule »

langcss wrote: post #14
rented_mule wrote: post #9

Earlier quoted context omitted.

During the dot com boom / crash, I worked at a profitable, VC funded startup. I don't know the legal / financial mechanism by which they did it, but our VCs shut us down six months after the crash. They wanted to put all of their attention into the other company in the portfolio that survived the crash, Yahoo, because their revenue was already far higher than ours could ever be. We were profitable (100s of K per year…

That makes no sense to me. They could give the company to the employees instead right? Unless they wanted the code or something.

They sold off the assets... the most valuable asset was our data. I don't know what they were paid for the data, but I'd guess a couple of million dollars given what I know they spent to migrate it to the buyer.

Re: Games People Play with Cash Flow (2020)

#30

Post by rented_mule »

nine_k wrote: post #16
langcss wrote: post #14

Earlier quoted context omitted.

That makes no sense to me. They could give the company to the employees instead right? Unless they wanted the code or something.

If the company was seen as a competitors to Yahoo, it looked reasonable to shut it down. The VCs invested in several companies that had a promising direction, then shut down all but one that was growing fastest and grew biggest.

We weren't in competition with Yahoo in the marketplace. But we were competing for the VCs' focus, and that's still competition.
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