Games people play with cash flow
commoncog.com
Games people play with cash flow
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Re: Games people play with cash flow
#2This 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. 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."
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 "loss" that saves them money on taxes, or Amazon, whose decades of "unprofitability" helped them to build a long-term-profitable empire.
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?
Re: Games people play with cash flow
#3The logical fallacy in the original post discussed is simply here:
> Therefore: startups shouldn’t raise money.
The therefore doesn't apply. The original post makes a good argument that there is a certain detriment to raising money. But he doesn't actually proof that this detriment outweighs the benefits of raising money.
Re: Games people play with cash flow
#4Once you have less skin in the game, it is easier to make bad decisions.
Surely that is a proposition that might not be entirely correct?
Re: Games people play with cash flow
#5There 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't think of and don't know might still change the correct answer.
Re: Games people play with cash flow
#6Don't raise money with equity is the message in the blog post he referred to. Equity is expensive and these days, debt is cheap.
Know your WACC. https://www.investopedia.com/terms/w/wacc.asp
Re: Games people play with cash flow
#7Just some thoughts.
TCI wasn't a startup. So it can't be compared to 2020 startups in this way. Because...you are starting the comparison at a different point in the companies life.
This is comparing markets almost 50 years apart. Motives and reasoning just aren't what they used to be.
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't looking for over valuations from Wall Street with a view to selling out for the $$$
Ok I'm bored now
Re: Games people play with cash flow
#8The bit about TCI (a cable company with a lot of debt in the 70s) is super interesting. I've read before about how companies don't always see debt as a bad thing, and how they can move money around, but it always seems like magic. From the article - "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". As the article mentions, Amazon followed a similar strategy for a long time.
It reminds me of a quote by the WWI French field marshal Foch - "My center is giving way, my right is retreating, situation excellent, I am attacking."
Re: Games people play with cash flow
#9The reason why many startups take venture capital is an attempt to scale very rapidly, hoping that they can achieve this before the huge tech companies get them on their radar and crush them by offering a similar product.
Re: Games people play with cash flow
#10This 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…
This is an important point. For this to work, step 0 is: have a functioning business. That’s what gives you the opportunity to then change the curve on your cash flow.
Another factor is your vendors. The cable business expanded (and expanded into) an existing ecosystem: tv mfrs, film studios etc. The restaurant already had vendors it could afford to lend 300K up front knowing that they would deliver reliably over the next four months. Also an operating business.
Likewise Amazon.
But the Ubers etc start without a viable business. In fact they start by skimming the cream of an existing market. The problem is, you get good at what you do. If you don’t build a viable business it becomes harder and harder to move your company into that mode as the environment changes.