Cash Is Only King If You Use It

I saw one of the investors in our funds on the plane back from SF last week. He reminded me that "cash is king" and certainly it is. We’ve done an analysis of our entire portfolio, the cash balances of each company, their cash burn rates, their runways (cash/burn) and have charted these metrics for our entire portfolio. We are feeling pretty comfortable but we’ve got some issues in our portfolio like everyone else in the venture business.

In the midst of that work, our friend (and investor in our funds) Tom Evslin writes this important post:

Cash is king. VCs like Fred Wilson are advising their portfolio companies
to be in cash-preservation mode for the very good reason that more cash
will be hard to come by and, if obtainable at all, may come with serious dilution
as its price. But, if your company has cash, this can also be a
wonderful time to spend. In the end you will succeed because of what
you DO spend your money on

Even with all the cutting that is going on out there (I can almost hear it), nobody is going to stop spending. And what you spend your precious cash on is critical. Go read Tom’s post for more.

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Comments (Archived):

  1. Gonzalo Arzuaga

    Sometimes “not spending” equals “saving” which in a uncertain economic environment might be healthy because you don’t know what might happen next. Spending it wisely, of course is obvious in a recession, but not spending it might prove a better strategy IMHO.If you try hard, you’ll find many many different ways to spend your money on, but having money reserves sounds much more relaxing these days.As Tom says in his post “Like all times, this is a time of opportunity” but this reminds me of Monopoly, when you get over any property you can get your hand on, but then you stumble an unlucky “pay taxes” or something like that (and you need to resell what you own at pennies on the dollar).

  2. andyswan

    Assets and talent are starting to go on sale!

  3. Dan Cornish

    If you have cash now and a positive cash flow, NOW is the time to spend, because all your competitors are hunkering down going into survival mode. They are not marketing, cutting back on research and customer support, etc.. Venture capital is very much like the real estate business. Companies use VC money as leverage. Real estate investors borrow money as leverage. The question is , is your company sub-prime.

  4. zackmansfield

    It’s certainly prudent for VCs and their portfolio company CEOs to fairly assess cash and runway to gain comfort that they are adequately capitalized for the next 12-24 months. Yet I agree that there can be a tendency to overreact to the situation at hand, becoming too risk averse with cash which will lead to missed opportunities. If spending without reason ahead of real revenues can lead to disastrous consequences for start-ups, it’s perhaps equally likely that not spending without reason could have similar consequences, albeit less explicitly at first glance. It’s not enough to just be prudent with cash – it must serve a purpose.

  5. Steve Murch

    I disagree with the title of the post. Cash can be king even if it’s not used. For instance, competitors might not enter the category if a well-capitalized competitor is sitting right there. Smart employee prospects will often consider a company’s balance sheet when figuring out which company to join. Cash prevents competitors from expanding into their turf, etc. Like a nation’s strong economy or military, a company’s strong balance sheet can be an asset simply by what behaviors it deters or encourages.Having said that, I don’t disagree with the idea that it’s a great time to prudently deploy some of that cash.

    1. bernardlunn

      That was not true after the Dot Com Bubble burst. There were lots of public listed companies with tons of cash (from IPO) and you could buy them for valuation of less than their cash reserve. I was buying “fallen angel” stocks at the time. The only ones worth buying were the ones narrowing the gap to profitability by growing revenue, even using cash to grow those revenues. All the “cash hoard” companies went smash, just did it slowly.

      1. Steve Murch, as well as the two companies it bought (the one I started as well as would fit the description of “cash hoarding”. They all did pretty well — EXPE climbed to a market cap north of $9 billion and is still the leader in online travel sales. The company I started raised $13 million and still had $11 million in the bank when we were acquired for $87 million in EXPE stock, which then did a nice 10x return on that stock. So, sometimes, it does pay to be frugal with cash, as we’re now finding out more broadly.

  6. Kendal H

    I miss when you used to blog throughout the day. I understand that Twitter and others are taking over this area, but for most people who have just discovered blogging in the last 1-2 years, they are not ready to move on to twitter, and are getting bored by the amount of blogs that are doing their one obligatory post in the morning and then forgetting about it. Twitter isn’t mainstream yet – don’t forget about your blog!

    1. fredwilson

      I really have never blogged much during the day. I have meeting packed days almost every day and I almost never blog after work.I have averaged about 2 posts per day for the entire 5+ years I’ve been blogging. Lately I’ve been writing about 10 posts per week. So the frequency has come down but it just means I am doing one post in the early morning instead of two.

      1. Kendal H

        Maybe it has a direct correlation with being bored at work and checking (hoping) for more posts 🙂 It was just a comment, however, as your blog is still the first on my feed.

  7. Stephanos Anton Ballmerfeld

    Cash is King only if you HAVE it!If you owe it, it’s a mutha’!

  8. AndyBeard

    In these turbulent times, what is more attractive for investment?1. A startup aiming for a specialist market that has proven revenue where emphasis on spending is on technology2. A startup aiming for a broader market that has more revenue, but equally more competition and spending is more likely on maintenance, customer support and marketing.My personal bias is for the first option, but potential partners seem to prefer the second

    1. fredwilson

      There is no right answer to this question. It largely depends on the people and their ambitions and appetite for risk

  9. vruz

    I might add… it’s only king if you *really* need to use it in some key operation

  10. dr. P

    How do you calculate burn rate?

    1. fredwilson

      Hmm. A good blog post here

  11. dr. P

    Where? Thx