Why Positive Cashflow Matters
Venture backed companies have a strange relationship to positive cashflow. Because they have financial backers who can and do finance losses, they tend to operate in the red for a long time.
In the early days it makes sense to burn cash. If you do not have revenues, you can’t generate cash. And if you can’t grow your revenues without investing out ahead of income, then you also need to be able to operate in the red.
But I have often felt that this muscle memory of investing for growth at the expense of profits can become, and does become, a habit that is hard to break.
If you have positive cashflow, you can control the timing and terms of your capital raises.
If you have positive cashflow, you can buy back your stock if any comes into the market at prices that you and your Board feels is below fair value.
If you have positive cashflow, you can borrow against it to purchase other companies or finance capital requirements.
If you have positive cash flow you can offer cash incentive compensation in lieu of ever more expensive equity compensation.
I could go on, but I suspect you get the point. Positive cash flow puts you on control versus the capital markets.
And that is a very valauble position to be in and one that a number of high flying tech companies probably wish they were in right now.
Yup.Struck home to me watching the video town hall version of the Zoom earnings release last week.What a crazy good business. Still kinda a startup but generating real profits and insane growth.Really loved the possibilities that video based conference calls bring. Still some quirks but like it a lot.
i’m mystified by how Zoom came outta nowhere, competed against other (excellent) options that were/are free, did so late after the field was “mature” and crowded, and still have excelled so much.I remember WebEx being such a web1.0 darling, but suffered in the crash…. wait a second: i just looked this up and it looks like WebEx sold for a few billion in 2007, and an early engineer of theirs is the one who founded Zoom. https://en.wikipedia.org/wi…
Been around for some time.If interested, go to my friend Bill Tai’s Twitter feed. He was their first seed investor, launched them I believe at his and Branson’s event at Neckar Island, and like all of his investments, active evangelist.I found them through him when working on a project together.As someone who has tried foolishly numerous time to build video platforms, they have cracked the nut–efficient, affordable and yup, getting more open all the time which a bunch of services, startups building on them.
the link i posted shows Zoom founded in 2011. WAAAY later than many many other such tools, including WebEx’s sale in 2007.my main point is maybe it’s never too late to dismiss a startup because they seem late to the game.
agreedoggedly determined to build the best possible product.A flywheel of customer adoption that was/is a monster starting in the tech world through their investors.
woah — this is fascinating:Zoom founder Yuan moved to the US in the mid-1990s, after trying nine times to obtain a visa !!https://medium.com/thrive-g…
Yup.Lookng forward to hanging around Zootopia next month as this is a global open(ing) platform happening before our eyes.
They wouldn’t let him rebuild the product from the ground up. Normally that’s not a good idea. Companies have failed trying to do that.But he was so motivated he quit and did it. Turns out every once in a while the old rules can be broken successfully.
Is it possible to scale and at same time have a Positive Cashflow?
Yes. There are three windows of cash resources: Positive Cashflow, Debt, and Venture Debt. The most expensive form of capital is VC investment-however it’s also the most forgiving since if you blow up, you don’t pay it back. Straight debt can be used and preserves equity, but it’s a double edged sword when you can’t pay it. Positive cashflow is the cheapest form of investment, preserves equity, but forces focus and might limit the company from trying things it wants to try.
great explanation thanks.
How will you get scale or acquire a market without Debt, and Venture Debt? We all know founder should focus on Positive Cashflow, but it is not possible in all scenario. When your competitor chasing you with product and half the price, when you have to fight legal battles to enter in a market. All these things require a lot of money and cash positive becomes illusion.To be cash positive one has to create his/her niche or stay frugal or non-fundable VC ideas ( low TAM)
the above is generic advice. every company is different. every founder is different. every sector is different. Strategize accordingly.
The explanation by pointsnfigures is a good one, but I think the question you are really asking is “Isn’t trying to scale using Positive Cashflow called ‘Bootstrapping’? And isn’t Bootstrapping really hard, maybe impossible?” So here’s how we did it at the company I run—at launch, raise enough VC money to get to profitability. We had a detailed breakeven analysis in the initial pitch, and we held ourselves to that. Trying to get that initial growth curve was hard, so right about the 24 month mark, when we were close to breakeven, we used debt financing to get us there and give us the ability to keep scaling without fear of having to pull everything back. We became cashflow positive, paid back the debt, and continue to look for ways to scale using cash to support new products and revenue streams while both trying to conserve cash and spend enough of it to keep scaling. Yes it was hard. Maybe not impossible. It may also depend on your metric of success for the word “scale”.
You can also prove that you have a business model that can generate positive cash flows, which it must at some point as a stand alone entity.Maybe an important question for “high flying tech companies”. If they scaled back growth expectations could they achieve positive cash flow? How much would they need to scale back to do so? Good to have in the back pocket.
I’d like to see a breakdown of % of startups (say, series B and up) that operate in the red now compared to when interest rates were higher.Have to imagine that the cheapness of capital deters the incentive to operate with positive cashflow.
What’s the inflection point on positive cash flow creation? I feel like those capable of producing it within 24 months end up truly thriving as they’ve found product market and business market fit.
Positive cash flow is also important because it tells whether the economics of the business are attractive or not. You can never be too sure when you are burning through cash rapidly.
LTV>CAC….produce where MC=MR
This behavior is ultimately driven by venture investors. High growth companies get investment at extraordinary valuations. Slower growth companies with cash flow are looked over because they’re not growing fast enough. Investors are always concerned about whether a market exists and almost always assume the business model can be figured out. This is impossible for companies to resist.
VC Industrial Complex – which will collapse relatively soon; the future VC firm will look more like and be lead by people like Elon Musk who understand whatever they put their mind to, feel a drive that it needs to be developed, and then find/support/hire good people to do it; people who are entrepreneurial and actually do “non-VC work.”
Have replied to you in the past to be careful about the halo effect re Musk.Maybe you might find what Bethany Mclean writes here of interest.https://www.vanityfair.com/…
Here, I thought you were going to argue for tokenized prediction marketplaces and direct consumer investment as an alternative. 😉
If you have positive cashflow… you may not need venture capital 🙂
AND, until you DO have positive cash flow you may not be ABLE to get venture capital!!!!As far as I can tell, essentially all of venture capital gets nearly all their funds from a not very long list of major institutional investors; in that investing there is the Golden Rule, he who has the gold makes the rules; those investors largely agree on some rules on investments; their limited partner venture capitalists follow those rules; the rules are basically from bending standard commercial banking lending given an asset; with the rules the most important justification for a venture capital investment is positive cash flow, say, even if they got that revenue not from their information technology work but just from selling BBQ out the back door at lunch time!!! :-)!!The all-time, unique, unchallenged, world class grand champions of information technology, with results that have over and over shaken the world, with batting average much higher than Silicon Valley, don’t follow those rules!
An expression you used before that stuck with me is ‘flirting with profits’. I used it many time since I read it here.
In an age of usury positive cashflow is a necessary defence.
Given that a venture capital firm’s job is to invest money incentivize them to have companies burn money faster? If every company became profitable tomorrow, venture would suffer. A bit of a conflict.
We have never raised VC, and we had to scramble all the time to raise enough money to grow. Our growth was far slower than if we got VC. I think a major problem is a capitalistic system for funding startups combined with government restrictions on who can invest (1933 blue sky laws). The JOBS Act greatly helped us and many other companies. But what really ultimately helped was the ability to issue a true utility token and build an ecosystem where we can partner with our clients and grow organically, each one doing what they’re good at. Thankfully there are novel economic models that seem to not involve securities transactions by the Howey test and even the Capital at Risk test.If this kind of ecosystem works, it will be a big game changer. VC funding has led to “zero to one” companies like Facebook, Google, Amazon et al. taking over the whole space and extracting rents. What if we could build a much freer market of reusable software components… like github but decentralized. We could do it for law, for journalism, for drugs and science and so on. Perhaps the upfront costs could be crowdsourced. They already are on open source projects, wikipedia, and most science except pharma. The economics lead to an explosion of growth. But they require a different system — copyleft, creative commons, patentleft etc. to grow up and outcompete the siloed corporate IP model.The world is changing. Today it’s dominated by systems of competition funded by private investors. I believe the future will increasingly be powered by systems of collaboration crowdfunded by tiny contributions, and featuring far less risk, duplication of work, and far more reusing (software, data like open street maps, fonts, graphics etc). It can restore faith in journalism and social networks and much more.I am a big fan of putting my money where my mouth is. I don’t have a lot of that money, but thankfully it’s an open ecosystem 🙂 It’s one step closer to building that World After Capital that Albert wrote about.(Check out https://qbix.com/whitepaper… for all the details.)
Moore highlights this many times in Crossing the Chasm, but says it really well in Chapter 8;“Until profitability is achieved, nothing is secure, and your destiny is not under your own control. This argues for early adoption.” Geoffrey Moore, Crossing the Chasm, Chapter 8, Location 3055Summary of Chapter 8.
Typo in last paragraph, “valauble” to valuable.
This article goes in the ‘Bleeding Obvious’ bin.
Positive cash flow does wonders for your sleeping patterns.