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.
Games people play with cash flow
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Re: Games people play with cash flow
#92I think the article is itself an example of broadly correct but for the wrong reason.
the problem with the argument from first principles that the article attempts to refute, is that the "first principles" given carry an implicit assumption that the minimum viable product is a a null product.
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.
The "first principles" also ignore time to market and competitive pressures. They are more "spherical cow on a frictionless plane" principles than actually useful ones.
Re: Games people play with cash flow
#93Had 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.
I quit after 2 because doing a startup means you have all eggs in one basket thus skin in the game is not reduced.
> Raising capital to do a startup reduces skin in the game (you’re spending other people’s money, after all
Peoples most scarce resource is the time they are investing and I have yet to meet a founder that doesn't do 80 hour week to make the wave next week.
Re: Games people play with cash flow
#94Could someone explain the core example about prepaying restaurant vendors?
(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.”
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.
Re: Games people play with cash flow
#95Most useful article I've read probably this year. 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. 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.…
If you liked this article, you might like the book The Goal or its application to the “project context” that software companies find themselves in, Critical Chain . They define a lot of business thinking as being focused on controlling costs, when in fact you want to first maximize revenues, and the kind of funky idea of measuring “dollar days” that one eventually gets to is an attempt (which I actually don't think i…
Cash is like air.
You can hold your breath only for so long before falling unconscious.
Re: Games people play with cash flow
#96Could someone explain the core example about prepaying restaurant vendors? (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 wast…
I assume the beef vendor doesn't have much cash on hand. So he can take the prepayment and give it directly to the cow farmer who also doesn't have a lot of cash and is happy to prioritize the preorder.
Re: Games people play with cash flow
#97This is a pretty good article but missed an opportunity to comment in more detail on the 2020 startup/unicorn ecosystem. "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…
I think it's harder to draw the line as to who's doing it incorrectly than it seems, without the benefit of hindsight.
Give an example from the telecoms world - I had a friend who worked for a telecoms startup, bootstrapping for funding and undercutting the local incumbent by using better technology. The incumbent responded by offering free service for a year to all the startup's customers if they switched back. An unsustainable move but hardly a bad decision - it had very deep pockets, and my friend's employer ran out of money first.
If Uber didn't have any competition, it could raise prices to profitability today. Investors still believe in it because they believe that Uber, like the Telecoms incumbent in my anecdote, can bankrupt the competition and then have its way with the consumer. Investors in Uber's competitors presumably have their own reasons for a similar thesis.
Re: Games people play with cash flow
#98The proposition can be disproved very early in the chain of logic, actually. 1. Startups are risky. True. 2. Raising capital to do a startup reduces skin in the game (you’re spending other people’s money, after all). Arguable, but not a given. Raising capital does not eliminate risk, especially if one has their own money in it, and/or are using it as a job. Just because someone else invested doesn't necessarily reduc…
Having more money can also increase the set of (good) choices available to you.
Re: Games people play with cash flow
#99A 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.
If, for example, your COGS approaches half your unit price and you use BTS, you'll have almost no chance of getting your business off the ground. But with BTO your cash flow explodes.
https://docs.google.com/spreadsheets/d/15JZyPEYJxNHEWTPFmxOI...
Re: Games people play with cash flow
#100Earlier quoted context omitted.
True, but I don't think that lodging is "something that never goes on the market". In this example, the mortgage or rental payments for an equivalent property would be pretty straightforward to determine.
I disagree. Lodging goes on the market all the time, but its market value is highly specific. There is no equivalent property to compare the corporate housing to.
What do you mean? Housing appraisals are done all the time based on finding comparable homes.