Cash and The Ugly Adolescent

I’ve written before about the ‘ugly adolescent’ stage that most companies go through between the ‘field of dreams’ stage and the ‘sustainable business’ stage.

This is the period when the companies start to grow headcount, generate revenue, define the business opportnity, and start operating in addition to innovating.

A year ago, I wrote a post explaining that web 2.0 was largely a blessing to VCs because the capital requirements curve had shifted to the right and it was now possible to get to ‘ugly adolosence’ (wasn’t using that phrase back then) with a very small amount of capital. So we in the VC business get the opportunity to see more development for less capital at risk. That also helps the entrepreneurs, maybe more so than the VCs.

But the ugly adoloscent phase is a cash consuming experience. Expenses always precede revenues. Scaling a web business requires servers, storage, and bandwidth. You need developers to maintain code, deal with scaling issues, and you still need to innovate. Revenues have to be suported, that means salespeople, business development people, and customer support people.

Revenues take a while to ramp and even longer to collect.

Your profit and loss statement says you have 200k a month in revenues and 500k a month in expenses. So you figure you are burning 300k in cash. Wrong. You are probably burning 400k to 500k. Because you had to pay three months rent in advance, buy an expensive netapps box, and you haven’t collected a dime of last month’s revenue yet.

This is the time to hire someone who knows about cash flow forecasting, gaap accounting, bank lines, collecting revenues, and managing your dwindling cash balances. You can call that person a CFO, VP Finance, Chief Cash Officer, or anything else. The title doesn’t really matter, but the function does.

Look for someone who is a ‘roll up your sleeves’ person who likes to engage with the other parts of the business. Look for someone who has been in a startup with growing pains before. Look for someone who can work nights and weekends. And be willing to pay them well. Because they’l save you way more than they’ll cost you if they are good.

Alan Shugart, the disk drive entrepreneur, once said that ‘cash is more important than your mother’.  In the adolescent stage, most things are. Fortunately we get through the adolescent stage and grow up. But its a painful time and you can lose a lot of your hard earned equity during this phase if you don’t manage your cash wisely.

#VC & Technology

Comments (Archived):

  1. ppearlman

    ha was looking for that post the other day, i think it was the one w the concave capital function relative to the constant slope of old… i notice u didnt link to it either… if u hap across a link and pass it along will be grateful…

    1. ppearlman

      found it! used “capital requirements curve” as search term… a critical post f dub… :)…

  2. vruz

    apart from the obvious traits (competent, hard working, energetic… those are pretty much a given) what else should we look for in a finance guy ?of course a good understanding of the company dynamics is needed, just wondering about “bean counting” culture vs. startup culture.

    1. Gregg Smith

      In my experience, the most successful ones do not fit the typical accountant stereotype. Good personality, willingness to get their hands dirty, integrity, but knowledgeable enough to be aggressive are all traits I see in successful startup financial accountants. Most accountants who fit the bean counter stereotype struggle with the chaotic nature and shifting responsibilities present in most startups (imho of course). I’ve been successful with a good mix of accounting skills, finance skills, relationships and communications skills have helped me climb to “startup” (not in the purest sense) CFO. I’ve had trouble hiring someone with those traits in my current city with the number of large companies who depend on bean counters to conform to their “best practices” developed over a long periods of time by much smarter and more experienced accountants. No room for adding value.

      1. fredwilson

        i agree with Gregg, startup culture is key. many finance/accounting types can’t deal with the chaotic nature of startups. so you need someone who is an anal/in control person who for some reason loves working around chaos and bringing some measure of clarity to the situation.

  3. kid mercury

    i do believe costs will continue to fall, especially as firms begin to collaborate more to share these costs. for instance open source development communities are already being used to reduce QA and development costs, and their usage will only accelerate. IMO this concept of pushing costs to the edge can be taken very far, and we are only at the beginning of the game.

  4. Michael Bailey

    An interesting post. Hopeful. For me especially, since I have a new service which I hope hits puberty real soon. I’ve ran it lean and mean for 23 months, burning up around $400k (well, thanks to my sponsors, Mastercard and Visa…can I call them sponsors, if I am the one paying them? Oh well, I digress).Keep the good posts coming, I certainly enjoy reading them.

  5. CJ needs some advice.