10 ms·

Games people play with cash flow

355 points by simonebrunozzi 4y ago

yamrzou 4y ago
Previously (2020) : https://news.ycombinator.com/item?id=25357669 https://news.ycombinator.com/item?id=25357669
hef19898 4y ago
It is funny how many old and traditional companies fail to see the importance of cash flow as well. Especially those with traditionally high profit margins and long lead times, as the matgin allowed them to finance thr necessary cash flow through banks. All fine and well, until margin break away.
- DavidPeiffer 4y ago
  A former coworker mentioned a prior job at a major food manufacturer. Apparently somebody realized they could mail the checks from across the country and still adhere to their payment terms. The extra day or two in the mail was worth pretty big money for the minimal effort required. I understand the rationale behind cash flow management, but I've always been a bit annoyed at the games around payment terms. It just feels like a chain of all companies lagging payment to suppliers while expecting (or hoping) for prompt payment from their customers. I'm curious what the world would look like if everyone was expected/required to pay within 2 weeks of services rendered? You might have payment terms agreed upon, but a megacorp has no issue delaying payment an extra 60 days and will cut a check for the original amount without agreed upon late fees included. Then a smaller company is left trying to manage the relationship after their margins are arbitrarily slashed.
  - hef19898 4y ago
    Cash flow is so much more than just payment terms.
  - bgribble 4y ago
    This was a painful learning for me when I worked for a megacorp: the bigger the customer, the less likely to pay on time. For me as an engineering manager at the “big customer” it was a constant embarrassment. We worked with small scrappy vendors who I was on a first-name basis with. Megacorp would just never cut the checks. They would negotiate super aggressive terms to start with and then still intentionally not meet the agreed terms. I had close collaborators telling me they really needed the $$ to meet their own bills and all I could say was “I’ll send another email to purchasing and hope for the best!” Hated that so much.
    - quickthrower2 4y ago
      Why not charge $big-customer more to compensate? Or avoid them altogether?
      - bgribble 4y ago
        I was the big customer, I was just powerless as a cog in the machine to make my employer pay on time. As the scrappy vendor, landing those big accounts is so important that you will take the risk even if it kills your business :(
      - dboreham 4y ago
        This is standard practice, but some vendors are inexperienced.
    - jhpaul 4y ago
      I had a similar experience at a mid-sized nonprofit. We would get generous pricing from vendors with reasonable terms, then the next time around I would find we were 5 months late paying them. The internal answer was "cash flow" and "well we wouldn't want to pay them too quickly", or worse "they shouldn't be complaining, they got their check much faster than X"
      - hef19898 4y ago
        Clever use of your payment terms is a valid strategy. Not respecting the agreed upon payment terms is bad business behavior, using cash flow as an excuse is just lazy. Or worse, a clear sign of financial trouble.
  - JumpCrisscross 4y ago
    > curious what the world would look like if everyone was expected/required to pay within 2 weeks of services rendered? You’d need to generate credit through the financial system versus trade at some nodes. Consider a diner. It orders ingredients. Adds value to them. Serves and collects payment. Let’s enforce instantaneous payment on this system. Now the diner has to borrow to buy ingredients. Or maybe it pre-sells “tickets.” The way some high-end restaurants do. Now the customer is financing them. If they don’t have credit, maybe this encourages their employee to pay them earlier. Et cetera.
  - BeFlatXIII 4y ago
    Now you have me smiling while imagine a future where someone crashes the world economy by messing with the cash flow games.
  - hnbad 4y ago
    I've literally had contractors working for certain BigCos tell me the companies insist on a 90 day due date on all invoices (at the end of the month of services rendered, ofc) and will still always be late on payments because they know that they can get away with it.
  - jiggawatts 4y ago
    The common answer to this is to break the project up into a series of milestones, and then put tools down whenever payment for a milestone is late. Generally large customers do actually have the cash, and simply have no incentive to pay on time, so why bother? Meanwhile, their internal deadlines are very strong incentives, and can get managers in serious trouble if repeatedly missed, especially by a year or more.
lifeisstillgood 4y ago
>>> Once the depreciation ran out on particular systems, they could then sell them to another operator, where the depreciation clock would start anew ohhhhh!!!! Tell me that's not the reason there are so many sub-contractors around. That seems a complex ut doable tax code fix
- caminante 4y ago
  I didn't follow the article closely, but I assume the author's alluding to resetting the accounting/tax/depreciable basis of the assets with an arm's length sale. There is a tax concept using "leased employees" where you pre-pay for a vendor to work on-site, and it counts as an asset on the balance sheet. I don't think that applies to independent contractors. Sub-contractors are popular because 1. They don't count in key performance metrics like revenues/employee or liabilities (paid vacation) 2. Their costs are buried further down the income statement and appear as non-recurring/variable. 3. They can ramp up/down with less approvals.
- sokoloff 4y ago
  It’s not nearly as large a dodge as presented. Ideally the economic (tax) life would be similar to the practical life, but “depreciation allowed or allowable reduces your basis” in the asset, so when you sell it, you will have a gain on the sale if it’s for more than your basis. You will be taxed on a portion of that which is depreciation recapture at a higher rate than the capital gains rate and at the capital gain rate for any gains above the basis plus depreciation recapture. So, the new operator gets to start depreciating from their basis (which is fair and right), but the old operator has a gain to have taxed (or delayed by a 1031 exchange). It’s a cash flow difference in taxes as well (making it fair to include in the article), but not a permanent avoidance of taxation.
- WastingMyTime89 4y ago
  There is no real fix here. The article is wrong. The effective tax erasure when you do that is not really significant. When you resell the depreciated asset, you make a profit which “erases” the depreciation and will have to pay taxes on that. You have actually just deferred your taxes. That can be advantageous cash flow wise but that’s pretty much it.
draw_down 4y ago
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davedx 4y ago
Eye-opening essay. I think this should be essential reading for any investor or business owner.
_xnmw 4y ago
Yes, and as I've learned the hard way, even a bootstrapped one-man-SaaS can use cashflow tricks to run a much more successful business.
- MattJ100 4y ago
  I'd find practical learnings from a bootstrapped one-man SaaS far more valuable than the examples used in the original post (all more large-scale companies with more room for refactoring). Any specific insights you can share?
- tw98521358 4y ago
  It actually Makes the most sense to mess with cash flow when you are small and scrappy and your loan terms are unfavorable. Megacorp can get a loan for significantly more favorable terms so the cost of financing is much lower on their end. As such it would be slightly advantageous for them to pay quickly and ask for a discount. Unfortunately the net benefit is small for mega corp and they usually can’t capture the savings
yayr 4y ago
great insight, but one point I miss is that to play games with cash-flow you got to have it in the first place. Some ideas really benefit from investment before a product is marketable (i.e. for research, production). Kickstarter etc. provide a great tool to generate that for consumer oriented products before the product is launched. There are many markets where this is not so simple or not possible.
wodenokoto 4y ago
During my college course on accounting cash flow was by far the most difficult to understand and I still find it difficult in light of the cable company example. As an owner you still want money to spend. How do you get that if not from the profits?
- chrisco255 4y ago
  Well in the cable example it was from capital investors. But also, since the business was pulling in cash flow it could use its present customer revenue to immediately reinvest in expanding the business. So on paper the business would show little to no profit, probably even negative in some years, while the business was actually growing at 30% a year. It's a riskier model for non-cash flow based businesses though, in my opinion. If you don't have a stable source of cash flow from something like a subscription model it's harder to count on revenue being consistent (unless you're dominating a particular market). Also can be risky if you only have one or a few clients providing the cash flow. If they pull out or go belly up, your business can be decimated with whatever overhead you added to provide for them.
- wongarsu 4y ago
  If you have growing cash flow, and can plausibly show that you will be making profit in the next 5 years, or even better that you could be making profit right now if you stopped reinvesting, you won't have a problem getting either investors or a bank loan.
- gvb 4y ago
  As an owner you still want money to spend. How do you get that if not from the profits? In the cable company example, from taxes (not paid) and accelerated depreciation (a big part of the taxes not paid). Money is fungible and cash is the ultimately fungible form of money. Tax money (not paid) is better than money taken as taxed profits. By running the business at a loss (from a profit/loss point of view), the cable company paid little or no taxes. You can take $100 in profit and pay $30 in taxes (net $70 in your pocket), or you can show $0 profit and roll that $130 into your business expecting $130 + growth in the future. Note that, with the cable company example, the cable company "was unprofitable" every year yet paid a compound return of 30% to its shareholders.
fedeb95 4y ago
The author states that the incriminated blog post is perfectly logically constructed. That is not the case. The argument: Once you have less skin in the game, it is easier to make bad decisions Doesn't quantify how much it's easier, and nothing follows from this. It may be ok that some startups (maybe even 99%) fail because not having skin in the game is not right for them. This may filter out, globally, bad startups. But let's allow the argument to be true and that the rest follows. Still it's all conditional to a specific startup making those mistakes, being easier to make doesn't mean they are made consistently.
- antiterra 4y ago
  The other way to think about it is that investors pitching in doesn’t reduce your own investment. If you take out a second mortgage and pour all your money into your business, you’ve got the same skin in the game regardless of what investor money your business takes from then on out.
- rightbyte 4y ago
  > Once you have less skin in the game, it is easier to make bad decisions Ye. It is quite ofent I am winning, get nervous, and lose. When playing competitions. Less skin in the game makes you cooler.
bjornsing 4y ago
I dislike when people think incorrectly and then say “thinking doesn’t work”. In this case the final step of the 6 step argument chain is just incorrect thinking. The conclusion does not follow from the “axioms” / accepted “prepositions”.
d_e_solomon 4y ago
The other side of the cash flow game is that you can be cash flow positive most of the time... but go out of business if you face occasional, large often complicated fixed costs. A robust accounting and pricing model is needed to plan for those fixed costs. It's like picking up pennies in front of a steamrolller if you only focus on short term cash flow. The other interesting example of cash flow games is Warren Buffet's focus on insurance. He really likes picking up people's premium payments and collecting interest on them until the claims hit. My limited understanding is that Buffet looks for those situations specifically.
- scrappyjoe 4y ago
  Buffet uses the held premiums - called _float_ - to invest in assets which generate a higher than required return for the eventual insurance claims. The way he sees it, the float is an interest free loan that you never have to pay back, as long as your incoming premiums each year are roughly equivalent to your outgoing claims each year. His strategy is to use this interest free loan to generate as high a return as possible, which he can then cream off the top for shareholders.
  - kqr 4y ago
    But it's only possible when you're well-capitalised and not as dependent on cash flows. See also the Kelly criterion, which makes it logical for one actor to offer and another to pay for insurance, despite the fact that both sides cannot have positive EV.
    - robocat 4y ago
      > despite the fact that both sides cannot have positive EV Maybe for the thing insured, but dependencies can cause ripple effect costs which can be very high, so both sides can have positive EV when considering the whole (not just the insurance). I think you are assuming all transactions are zero-sum? Not something I know much about, so quite probably I just misunderstand your comment.
quickthrower2 4y ago
> Once you have less skin in the game, it is easier to make bad decisions. The author argues this is due to a) having a capital buffer to cushion you, and b) having more time to waste. I don’t see how it follows. People may make worse “penny-wise pound-foolish” decisions when it is their own money. Using done by hand SEO instead of ads to save money for example and it taking longer to get customers, as a made up example.
- CPLX 4y ago
  Yes the original premise he’s trying to refute can be dismissed far more easily. That argument has as a premise that taking on investment increases risk. For the most part that’s simply not true, having more money in hand reduces risk for a business.
  - blitzar 4y ago
    > taking on investment Also means (generally) finding someone to invest, which (generally) means getting your head around your business what you do, what you are going to do next, and what you are going to do with the money, a plan one might say. This plan is then considered by the investing party and if it is total nonsense, no investment.
- imtringued 4y ago
  There are upsides to raising capital which haven't been addressed by the article that argues against raising capital.
  - quickthrower2 4y ago
    The posted article argues against (or exposes) faulty logic, and to do this talks about cashflows but misses the simpler flaw in the argument it critiques.
- nmfisher 4y ago
  In your made-up example, though, the SEO may build a long-term pipeline whereas the ads are one-and-done. That’s without mentioning the mentality foisted on companies to “just show user growth in the next quarter, don’t worry about profitability”. The devil’s in the details.
maCDzP 4y ago
This was a great essay. Does anyone subscribe to commoncog - is it worth it? Compared to just getting books from libgen?
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pedrocr 4y ago
An insight I've found very useful in many areas is to separate cases where you're satisfying requirements versus optimizing. If you're satisfying, a single logical argument for a decision is enough. If you're answering the question of "How to add 10M of new revenue to this business?" there are many valid answers and you just want to test a few and land on one that's well supported by an argument. Then go execute that and do it all over again later. If you're maximizing though it's much trickier. If you're answering the question of "What's the ideal way to raise capital for this business?" a single logical argument is not enough because you often misrepresent the search space and end up doing very precise optimization of a tiny subset of options for example. A good option is to turn optimization problems into satisfying problems by specifying them more. "How can I raise capital at cost below X, amount above Y, in under Z months?" gives you most of the value of the optimization problem. It doesn't give you a general insight but it may even give you more value than that by forcing you to define your constraints properly. It's common to find that once you try to fill in X/Y/Z to even start working on hypothesis you find out not everyone has the same view. Having that discussion is often more valuable than any fancy generic optimization you could do to the problem.
- lucumo 4y ago
  Thank you for sharing that insight! I've often found myself doing something like that. When my natural inclination is to optimize, and the smart decision is to satisfy, having it as explicit words will help me make a decision faster.
adql 4y ago
> At first glance, there doesn’t seem to be anything that’s explicitly wrong with this argument. I agree with all the base ideas, and I found myself nodding to the intermediate propositions. The logical correctness of the argument wasn’t a problem. No, my unease stemmed from experience: I knew this wasn’t the right way to think about raising capital. But I couldn’t begin to construct an argument that went against it. The original argument could be very easily argued - you just might not have enough money to get your foot in target market in the first place and not every business can be stared by single person and some savings anymore. I don't see why author of article didn't just do that instead of pages of arrogant faffing because he got offended he couldn't invent a counter-argument to a (not only one, just one) way to make sensible business that many people succeeded just fine utilizing
- IshKebab 4y ago
  > pages of arrogant faffing Good description. If you have a point to make, make it!
- sarchertech 4y ago
  If you read the original article, the author says right at the beginning that of course some startups should raise money. The original argument was just that it shouldn’t be the default position.
  - ilyt 4y ago
    Right but that makes this rambling even more pointless. It's as if author just doesn't have any sensible reasoning for his gut feeling that "startups should raise money by default" then is annoyed that he can't produce anything sensible on the topic but someone else can produce reasonable argumentation for opposite, then started giving up random examples of how not-startups companies use cash flow, and nothing there was really related to original topic on how to start and grow your startup. And all of the examples fit nicely into hard to get/expensive to get markets that need a bunch of money upfront > I’m not suggesting that there are never reasons to take outside investment. Obviously there are. But, we should recognise that doing so comes with significant trade-offs and difficulties that mean it shouldn’t necessarily be the default. that the original article suggested.
ourmandave 4y ago
Now I have the Spinners song Games People Play stuck in my head. https://www.youtube.com/watch?v=vbkg1WXf594 https://www.youtube.com/watch?v=vbkg1WXf594 At least it's not Holly Jolly Christmas.
- deleted 4y ago
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ritzaco 4y ago
This is a bunch of rhetoric dressed up as logic hidden by using long paragraphs. If you break it down and remove the repetition it is basically saying: 1. the other guy made some argument 2. but he was just too ignorant to understand why his argument was wrong 3. I am smart and I do SENSEMAKING 4. therefore other guy's argument is wrong As far as I can tell, the actual first argument is something along the lines of 1. many founders raise capital and waste it because it's not "their money" so they part ways with it more easily 2. this leads to failed businesses 3. therefore founders should not raise money and the counter argument is 1. some businesses need upfront capital and the returns only come later 2. some founders can raise capital and use it effectively, instead of wasting it, even though it isn't "their money" 3. therefore founders should raise money which are both good arguments and in no way contradict each other. I have seen founders do both, and it's true that some money is raised when it was not needed, and some money is raised and then squandered, and some money is raised and used effectively to generate massive returns. That's why it's called "venture" capital.
- FlyingAvatar 4y ago
  Thanks for writing this. This was my sentiment as well. I feel that the anecdotes about cash flow are somewhat interesting, but the whole 'proving an argument' narrative is unsubstantiable fluff. The cash flow strategies are things which can be leveraged in specific situations, but are generally not global truths that most early stage startups can action on.
- ms7892 4y ago
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- ShittyKickflips 4y ago
  I agree with you, got same feeling from reading. When i hear question should I raise only right answer is: it depends, what is your context? But I guess it is hard to sound smart this way :)
  - Inhibit 4y ago
    Smart or not it's hard to make ad revenue (or get readers, whatever the author's going for) with a concise summary or a context heavy conversation.
mwill 4y ago
Relating to cash flow and payment terms, my company (outside of tech) has a particularly large client (rev >$2B AUD, 10k employees worldwide) that has us on 45 days EOM, but accounts team won't accept an invoice without a ref#, which are given by the "receipting team" after site confirms work is completed The mysterious "receipting team" is not in the main office, and has no phone number or even names listed, emails are never directly replied to, instead site contacts will call to relay questions/answers from them, ref# come from an automated do-not-reply email. They will quite often be "backlogged" and fail to send a ref# before the the end of the month, and suddenly will be cleared up on the 1st of the month. We've had jobs that finished in the first week of a month, been ignored for 25 days, received a ref# with an apology for the delay on the 1st of the following month, get paid 45 days end of that month. So up to 100 days from completing work to getting paid. All our accounts are POS, 7 days EOM, or 30 days EOM, and must be paid on time or we lose supply. So to do a job with $100k of materials and wages for them, we have to have $100k spare cash for up to 60-100 days It's not a cashflow problem, they're sitting on reserves and we're a blip on their radar, less than 1/10th of a percent of their outgoings So we quote them outrageously high, and they never blink. I've told them some jobs would be up to 50% less if they paid quicker, and they've outright said they'd rather hold the cash and pay more. For a sense of scale we've invoiced them about $500k a year for the last few years, they've told me to clear out a couple weeks for two jobs that are nearly that much each, in February and April this year. I can't figure out who's getting the bad deal, them or me, I keep assuming they must have some massive upside I'm not seeing ¯\_(ツ)_/¯
- sokoloff 4y ago
  If you can swing the cash flow, keep billing them at a rate that makes sense for your business. So many AP departments are incentivized on payment delays. Let them “win” their stupid game and just build the cost plus some extra into your rates.
  - mwill 4y ago
    Yeah thankfully we can swing it, but we've actually turned down some work for other clients here and there because I've done the math and figured there was too much overlap/risk with this particular clients jobs.
JumpCrisscross 4y ago
This is a long-winded refutation of an article [1] that ignores economies of scale. [1] https://ensorial.com/2020/dont-raise-money/ https://ensorial.com/2020/dont-raise-money/
rossdavidh 4y ago
I couldn't make it through this (rather long) article, in part because a lot of it seemed to take as a given that you could predict interest rate movements. There are, probably, a large # of companies out there right now who have made keeping a large debt load part of their way of doing business, who are right now starting to find out that this makes them fragile. Nassim Nicholas Taleb, a grumpy guy who nonetheless makes some good points sometimes, said debt was a way to "fragilize". Like Just-In-Time manufacturing, it can make sense up to a point, but is often taken way further, to the point of being a bet that nothing in your environment will change.
- conformist 4y ago
  At least for bigger companies that doesn't appear to hold (if I understand the point)? - they can borrow at a fixed rate by issuing bonds or they can enter into a swap to pay fixed and receive floating to hedge out their interest rate exposure.
jason_zig 4y ago
> ...You could just as well bootstrap a tiny, successful internet business selling Wordpress plugins or Shopify themes, believing that ‘startups shouldn’t raise capital’. You would then never need to update your beliefs, because those are perfectly sufficient for a small, independently-run business. At the scale of a one or two person show the up front costs for building and selling your software are pretty reasonable. This setup rearranges how much cash you need up front to 1. be competitive and 2. win over new business. True this has a cap on it of say... ~1-2M ARR but that's a very reasonable game for a lot of smart people to be playing. I didn't read the original article he's arguing against, but if that's the style business they are discussing then the "don't raise" argument holds up. Frankly given the original article's conclusion of "don't raise money" I suspect they weren't focusing a post-IPO cable business...
Joel_Mckay 4y ago
It is difficult to detect auto-generated content, but it also does not preclude the possibility an author was having a stroke during composition. By definition, one no longer fully owns a company when exchanging ownership for liquid capital (often at ridiculously discounted value), or lose future well-being through debt-financing issues/predatory-scams. Note, the often negligible incremental cost of scaling tech companies often offsets the expected value in investment risk. Every fist-year student learns Bayesian statistics, but Vegas was built on those who still can't assess risk. In general, a small service site like Craigslist operates just fine with minimal overhead, and has remained functional much longer than most startups. It was really sad seeing what Silicon Valley Bank did to startup culture, and naive investors that get FOMO. Happy 2023 =)
coding123 4y ago
This makes sense to me. I am trying to build a house, and I have recently hit a funding issue. My cash flow is the problem. I want to take on more debt to get it done, but to do that makes me starve. So my solution is to get a better paying job so that my cash flow clears up and the debt is easier to manage. The debts are not huge, just lots of short term loans that clear up in a few months. Doing this without a mortgage but with lots of small temporary loans looks a lot like this. The end result is a house that should cost $300k for more like $100k.
ardel95 4y ago
I really enjoyed the article. The only thing that stood out was that the argument the author set out to dispel had a much simpler flaw. In the original argument, point number 3 (having less skin in the game leads to bad decisions) is the weakest one. That statement isn’t really a first principles fact, but at best a hypothesis. IMO, not even a good one. For all we know, having less extreme exposure may lead to better decisions, as the founder may be open to more calculated risks. And even IF true that statement doesn’t address the tradeoffs: maybe bad decisions are outweighed by the ability to outrun the competitors due to influx of extra cash. While there is certainly some correlation in such arguments, the bar for proving causation needs to be much higher than a pithy statement. All that being said, I really enjoyed the rest of the argument.
- balderdash 4y ago
  I agree. 1) because the company took outside money does not decrease your skin in the game (if substantially all of your net worth was in the company before a funding round, and it was all primary capital raised, then you’re still “all in”). 2) when people are over invested exposed, their risk tolerance typically goes down not up (even if the payoffs have high expected returns)
- cik2e 4y ago
  Great read. The real problem with "the skin in the game argument" is that it's a matter of opinion, but one opinion is more likely to be right. >> Raising capital to do a startup reduces skin in the game (you’re spending other people’s money, after all). The more likely correct take is as follows. Note that I am changing just one word. The right version: >> Raising capital to do a startup INCREASES skin in the game (you’re spending other people’s money, after all). The naïve take seems to place no value on reputation (ability to get more financing in the future).
- hddqsb 4y ago
  I think there is a much bigger flaw in the version of the argument stated in the article. The argument boils down to "here is a bad thing about raising capital, here is a good thing about not raising capital, therefore not raising capital is better". But there are other pros and cons that this argument is ignoring, so it is not logically correct. I also think the version in the article is an unfair representation of the original blog post (https://ensorial.com/2020/dont-raise-money/ https://ensorial.com/2020/dont-raise-money/), which explicitly says > I’m not suggesting that there are never reasons to take outside investment. Obviously there are. But, we should recognise that doing so comes with significant trade-offs and difficulties that mean it shouldn’t necessarily be the default. (I see that @ilyt already posted this exact quote.)
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miamowers 4y ago
The issue with the original article seems like it could be summed up pretty simply, startups, for their founders and investors, aren't meant to create profit, they are meant to increase equity. Therefore having the same business model as a cancerous tumor makes perfect sense, consume as much free resources (low interest debt) as possible to grow as large as possible in as short a time as possible, independent of any external effects or moral hazards that creates. So in that way at least the original article does have a point, in a better world startups most likely shouldn't take as much funding as they do, but in the current world, the correct answer for any particular startup will always be to do exactly that.
stevenjgarner 4y ago
A fun "thought" experiment? Given the time of year (just after a fiscal quarter/year end) and given that I am a dual citizen (New Zealand and USA), I found the following demonstration particularly intriguing: a bank customer (friend) had some not insignificant funds in several personal accounts in their NZ banks as of December 31st. At 10 am on Sunday, January 1st (NZ time), it was "still" 3 pm Saturday, December 31st in the central time zone in the US. I watched as they withdrew a large amount of USD cash from multiple debit cards on their NZ accounts at some midwestern ATM machine(s), then turn around and deposit said cash into their US bank accounts. Net effect: their net worth showed accumulated fiscal year-end bank balances of twice the "not insignificant amount of funds" (according to cash methods of GAAP). They went on to hint at the fact there are 24 time zones on this planet (more actually). I asked about the legality of such antics. They said they were not sure other than any obvious fraud on using such financial statements for any fraudulent financial benefit. They explained how the daily batch processing of bank transactions hurt customers real time cash flow, and felt it was one way to rectify things to the customer advantage. Hmmmm
- fiestaman 4y ago
  Layman here: what are the consequences of having a net worth of accumulated fiscal year-end bank balances of twice the "not insignificant amount of funds"?
  - stevenjgarner 4y ago
    On the face of it, it looks like you have twice the liquid net worth than you actually have (or more with multiple countries). Often financial statements will be prepared by different accounting firms in different countries, and each set says you had the same amount of money on hand on the same date, even though you only had one. It is not so much a delusion of wealth as a delusion of time. When people refer to a date (such as a fiscal year end), they think that date is the same everywhere but of course midnight on December 31st happens in every one of the 24+ time zones.
stevenjgarner 4y ago
I urge those interested in cash flow games to read "The Sovereign State of ITT" by Anthony Sampson.
svusa 4y ago
The example in the article of how the restauranteur halved his food costs simply by pre-paying his supplier rather than paying Net-120 (120 days after goods are delivered) fascinated me. Where exactly does the value of cash flow come from? Rehashing the example from the article: Why do restaurants pay Net-120? Suppose Restaurant R is buying 30-day dry-aged steak from Supplier S. R needs to buy the steak days in advance of cooking it to serve customer C. R receives money for the steak only after this point, and now R can pay back S. Why is pre-payment better? S can now be more efficient about the number of cows they have to slaughter. If R pays by Net-120, S ends up with a lot of waste due to unsold dry-aged steak, because S cannot anticipate the true demand but must be prepared to capture it to earn money. Analysis: In effect, S and R are pushing C to plan better. If C can just confirm that they want dry-aged steak ahead of time, which involves significant preparation, the entire supply chain can be more efficient. Sometimes, planning ahead is a benefit for C, as landing reservations at top restaurants can be difficult. Other times, C does want the ability to make last-minute decisions on where to go for food. Meanwhile, S can do something better than slaughter the cows that would have gone to waste. In essence, S has more freedom because S has more cash flow. So does more cash flow == more freedom? Cash is the most liquid asset. Supposedly, it represents the value that you can transfer immediately. I can have all the cash in the world, but if I am bound to pay a ton of debt with that cash, do I really have the ability to use the cash for something I value? That's why cash flow is a separate, and more useful, concept. One argument against "cash flow == freedom" is that cash flow can be a function of effort. If I spend all of my waking hours working, I will generate cash flow, but I won't get to enjoy anything. What about landlords who don't have to do much to earn cash? Well, cash flow in strict $ terms doesn't capture everything. Businesses don't have this problem because they can simply capture the effort for producing cash flow in terms of wages. A simple trick is to pin a cash value for the amount of time I spend. Cash flow represents freedom because cash flow = value in - value out at a given point of time. You don't even need to use USD for the "cash" part of cash flow, if that's not what you value. Then, to increase cash flow, you can 1) strictly increase "value in" (e.g. work more), 2) strictly decrease "value out" (e.g. delegate a task to free up your time), or 3) increase "value in" more than "value out" for a single transaction (e.g. take out a loan). Increasing cash flow doesn't need to be immediate: you can work on an asset and incur negative cash flow initially to establish better long-term cash flow. Worse "value in - value out" now for a better "value in - value out" in the future. It's neat to see how to apply accounting principles to optimize my day-to-day.
birdyrooster 4y ago
The most glaring and obvious problem with this model is that your customers are paying for all of your investment. If you can’t invest large or fast enough to provide benefits your customers need, they will most certainly leave. The second most glaring flaw is that the shortest path to what the customer wants does not lead to Macintosh or iPod or Watch. Big ideas need big investment before customers come around to the idea. This articles wastes too much time on its appeal to personal incredulity when the answers are so obvious.
_glass 4y ago
I love it that it concludes with what is called abduction in my field of academia. So in general you would have deduction, you reason from a set of principles, or induction, you reason from specific instances towards the principles. Abduction is like induction, but that you find a completely new type of principles, unknown before.
jldugger 4y ago
> I realised I didn’t have a good argument for why it was wrong. Every axiom and intermediate proposition were ideas that I agreed with. And it wasn’t so simple as the conclusion being flat out mistaken So... its pretty clear that time is poorly understood in the axioms presented, and the author comes to that conclusion at the halfway mark. And frankly so is risk. But nobody--myself included-- wants to read an accurate axiomatic representation of probability distributions and discount rates. But in so doing I expect that the bit about "skin in the game" would be hard to ground. The argument is that if you have 100 percent of your wealth tied up in one enterprise you are going to be very careful. Very risk averse. But what is the optimal level of risk taking? Zero? It's not a hypothetical. Especially in tech startups, projects can have wide error bars on completion time. Short runways mean you can really only pick from among the shortest options in the solution space, and longer implementation plans are discounted. Maybe thats good. But it seems like a huge shortcut to say "the shortest path is optimal."
SergeAx 4y ago
So, am I understood correctly that the endgame of cable or Amazon business is selling the company, as a whole or via IPO? And what the endgame for buyer(s) would be then?

Previously (2020) : https://news.ycombinator.com/item?id=25357669 https://news.ycombinator.com/item?id=25357669

hef19898 4y ago

It is funny how many old and traditional companies fail to see the importance of cash flow as well. Especially those with traditionally high profit margins and long lead times, as the matgin allowed them to finance thr necessary cash flow through banks. All fine and well, until margin break away.

DavidPeiffer 4y ago
A former coworker mentioned a prior job at a major food manufacturer. Apparently somebody realized they could mail the checks from across the country and still adhere to their payment terms. The extra day or two in the mail was worth pretty big money for the minimal effort required. I understand the rationale behind cash flow management, but I've always been a bit annoyed at the games around payment terms. It just feels like a chain of all companies lagging payment to suppliers while expecting (or hoping) for prompt payment from their customers. I'm curious what the world would look like if everyone was expected/required to pay within 2 weeks of services rendered? You might have payment terms agreed upon, but a megacorp has no issue delaying payment an extra 60 days and will cut a check for the original amount without agreed upon late fees included. Then a smaller company is left trying to manage the relationship after their margins are arbitrarily slashed.
- hef19898 4y ago
  Cash flow is so much more than just payment terms.
- bgribble 4y ago
  This was a painful learning for me when I worked for a megacorp: the bigger the customer, the less likely to pay on time. For me as an engineering manager at the “big customer” it was a constant embarrassment. We worked with small scrappy vendors who I was on a first-name basis with. Megacorp would just never cut the checks. They would negotiate super aggressive terms to start with and then still intentionally not meet the agreed terms. I had close collaborators telling me they really needed the $$ to meet their own bills and all I could say was “I’ll send another email to purchasing and hope for the best!” Hated that so much.
  - quickthrower2 4y ago
    Why not charge $big-customer more to compensate? Or avoid them altogether?
    - bgribble 4y ago
      I was the big customer, I was just powerless as a cog in the machine to make my employer pay on time. As the scrappy vendor, landing those big accounts is so important that you will take the risk even if it kills your business :(
    - dboreham 4y ago
      This is standard practice, but some vendors are inexperienced.
  - jhpaul 4y ago
    I had a similar experience at a mid-sized nonprofit. We would get generous pricing from vendors with reasonable terms, then the next time around I would find we were 5 months late paying them. The internal answer was "cash flow" and "well we wouldn't want to pay them too quickly", or worse "they shouldn't be complaining, they got their check much faster than X"
    - hef19898 4y ago
      Clever use of your payment terms is a valid strategy. Not respecting the agreed upon payment terms is bad business behavior, using cash flow as an excuse is just lazy. Or worse, a clear sign of financial trouble.
- JumpCrisscross 4y ago
  > curious what the world would look like if everyone was expected/required to pay within 2 weeks of services rendered? You’d need to generate credit through the financial system versus trade at some nodes. Consider a diner. It orders ingredients. Adds value to them. Serves and collects payment. Let’s enforce instantaneous payment on this system. Now the diner has to borrow to buy ingredients. Or maybe it pre-sells “tickets.” The way some high-end restaurants do. Now the customer is financing them. If they don’t have credit, maybe this encourages their employee to pay them earlier. Et cetera.
- BeFlatXIII 4y ago
  Now you have me smiling while imagine a future where someone crashes the world economy by messing with the cash flow games.
- hnbad 4y ago
  I've literally had contractors working for certain BigCos tell me the companies insist on a 90 day due date on all invoices (at the end of the month of services rendered, ofc) and will still always be late on payments because they know that they can get away with it.
- jiggawatts 4y ago
  The common answer to this is to break the project up into a series of milestones, and then put tools down whenever payment for a milestone is late. Generally large customers do actually have the cash, and simply have no incentive to pay on time, so why bother? Meanwhile, their internal deadlines are very strong incentives, and can get managers in serious trouble if repeatedly missed, especially by a year or more.

lifeisstillgood 4y ago

>>> Once the depreciation ran out on particular systems, they could then sell them to another operator, where the depreciation clock would start anew ohhhhh!!!! Tell me that's not the reason there are so many sub-contractors around. That seems a complex ut doable tax code fix

caminante 4y ago
I didn't follow the article closely, but I assume the author's alluding to resetting the accounting/tax/depreciable basis of the assets with an arm's length sale. There is a tax concept using "leased employees" where you pre-pay for a vendor to work on-site, and it counts as an asset on the balance sheet. I don't think that applies to independent contractors. Sub-contractors are popular because 1. They don't count in key performance metrics like revenues/employee or liabilities (paid vacation) 2. Their costs are buried further down the income statement and appear as non-recurring/variable. 3. They can ramp up/down with less approvals.
sokoloff 4y ago
It’s not nearly as large a dodge as presented. Ideally the economic (tax) life would be similar to the practical life, but “depreciation allowed or allowable reduces your basis” in the asset, so when you sell it, you will have a gain on the sale if it’s for more than your basis. You will be taxed on a portion of that which is depreciation recapture at a higher rate than the capital gains rate and at the capital gain rate for any gains above the basis plus depreciation recapture. So, the new operator gets to start depreciating from their basis (which is fair and right), but the old operator has a gain to have taxed (or delayed by a 1031 exchange). It’s a cash flow difference in taxes as well (making it fair to include in the article), but not a permanent avoidance of taxation.
WastingMyTime89 4y ago
There is no real fix here. The article is wrong. The effective tax erasure when you do that is not really significant. When you resell the depreciated asset, you make a profit which “erases” the depreciation and will have to pay taxes on that. You have actually just deferred your taxes. That can be advantageous cash flow wise but that’s pretty much it.

draw_down 4y ago

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davedx 4y ago

Eye-opening essay. I think this should be essential reading for any investor or business owner.

_xnmw 4y ago

Yes, and as I've learned the hard way, even a bootstrapped one-man-SaaS can use cashflow tricks to run a much more successful business.

MattJ100 4y ago
I'd find practical learnings from a bootstrapped one-man SaaS far more valuable than the examples used in the original post (all more large-scale companies with more room for refactoring). Any specific insights you can share?
tw98521358 4y ago
It actually Makes the most sense to mess with cash flow when you are small and scrappy and your loan terms are unfavorable. Megacorp can get a loan for significantly more favorable terms so the cost of financing is much lower on their end. As such it would be slightly advantageous for them to pay quickly and ask for a discount. Unfortunately the net benefit is small for mega corp and they usually can’t capture the savings

yayr 4y ago

great insight, but one point I miss is that to play games with cash-flow you got to have it in the first place. Some ideas really benefit from investment before a product is marketable (i.e. for research, production). Kickstarter etc. provide a great tool to generate that for consumer oriented products before the product is launched. There are many markets where this is not so simple or not possible.

wodenokoto 4y ago

During my college course on accounting cash flow was by far the most difficult to understand and I still find it difficult in light of the cable company example. As an owner you still want money to spend. How do you get that if not from the profits?

chrisco255 4y ago
Well in the cable example it was from capital investors. But also, since the business was pulling in cash flow it could use its present customer revenue to immediately reinvest in expanding the business. So on paper the business would show little to no profit, probably even negative in some years, while the business was actually growing at 30% a year. It's a riskier model for non-cash flow based businesses though, in my opinion. If you don't have a stable source of cash flow from something like a subscription model it's harder to count on revenue being consistent (unless you're dominating a particular market). Also can be risky if you only have one or a few clients providing the cash flow. If they pull out or go belly up, your business can be decimated with whatever overhead you added to provide for them.
wongarsu 4y ago
If you have growing cash flow, and can plausibly show that you will be making profit in the next 5 years, or even better that you could be making profit right now if you stopped reinvesting, you won't have a problem getting either investors or a bank loan.
gvb 4y ago
As an owner you still want money to spend. How do you get that if not from the profits? In the cable company example, from taxes (not paid) and accelerated depreciation (a big part of the taxes not paid). Money is fungible and cash is the ultimately fungible form of money. Tax money (not paid) is better than money taken as taxed profits. By running the business at a loss (from a profit/loss point of view), the cable company paid little or no taxes. You can take $100 in profit and pay $30 in taxes (net $70 in your pocket), or you can show $0 profit and roll that $130 into your business expecting $130 + growth in the future. Note that, with the cable company example, the cable company "was unprofitable" every year yet paid a compound return of 30% to its shareholders.

fedeb95 4y ago

The author states that the incriminated blog post is perfectly logically constructed. That is not the case. The argument: Once you have less skin in the game, it is easier to make bad decisions Doesn't quantify how much it's easier, and nothing follows from this. It may be ok that some startups (maybe even 99%) fail because not having skin in the game is not right for them. This may filter out, globally, bad startups. But let's allow the argument to be true and that the rest follows. Still it's all conditional to a specific startup making those mistakes, being easier to make doesn't mean they are made consistently.

antiterra 4y ago
The other way to think about it is that investors pitching in doesn’t reduce your own investment. If you take out a second mortgage and pour all your money into your business, you’ve got the same skin in the game regardless of what investor money your business takes from then on out.
rightbyte 4y ago
> Once you have less skin in the game, it is easier to make bad decisions Ye. It is quite ofent I am winning, get nervous, and lose. When playing competitions. Less skin in the game makes you cooler.

bjornsing 4y ago

I dislike when people think incorrectly and then say “thinking doesn’t work”. In this case the final step of the 6 step argument chain is just incorrect thinking. The conclusion does not follow from the “axioms” / accepted “prepositions”.

d_e_solomon 4y ago

The other side of the cash flow game is that you can be cash flow positive most of the time... but go out of business if you face occasional, large often complicated fixed costs. A robust accounting and pricing model is needed to plan for those fixed costs. It's like picking up pennies in front of a steamrolller if you only focus on short term cash flow. The other interesting example of cash flow games is Warren Buffet's focus on insurance. He really likes picking up people's premium payments and collecting interest on them until the claims hit. My limited understanding is that Buffet looks for those situations specifically.

scrappyjoe 4y ago
Buffet uses the held premiums - called _float_ - to invest in assets which generate a higher than required return for the eventual insurance claims. The way he sees it, the float is an interest free loan that you never have to pay back, as long as your incoming premiums each year are roughly equivalent to your outgoing claims each year. His strategy is to use this interest free loan to generate as high a return as possible, which he can then cream off the top for shareholders.
- kqr 4y ago
  But it's only possible when you're well-capitalised and not as dependent on cash flows. See also the Kelly criterion, which makes it logical for one actor to offer and another to pay for insurance, despite the fact that both sides cannot have positive EV.
  - robocat 4y ago
    > despite the fact that both sides cannot have positive EV Maybe for the thing insured, but dependencies can cause ripple effect costs which can be very high, so both sides can have positive EV when considering the whole (not just the insurance). I think you are assuming all transactions are zero-sum? Not something I know much about, so quite probably I just misunderstand your comment.

quickthrower2 4y ago

> Once you have less skin in the game, it is easier to make bad decisions. The author argues this is due to a) having a capital buffer to cushion you, and b) having more time to waste. I don’t see how it follows. People may make worse “penny-wise pound-foolish” decisions when it is their own money. Using done by hand SEO instead of ads to save money for example and it taking longer to get customers, as a made up example.

CPLX 4y ago
Yes the original premise he’s trying to refute can be dismissed far more easily. That argument has as a premise that taking on investment increases risk. For the most part that’s simply not true, having more money in hand reduces risk for a business.
- blitzar 4y ago
  > taking on investment Also means (generally) finding someone to invest, which (generally) means getting your head around your business what you do, what you are going to do next, and what you are going to do with the money, a plan one might say. This plan is then considered by the investing party and if it is total nonsense, no investment.
imtringued 4y ago
There are upsides to raising capital which haven't been addressed by the article that argues against raising capital.
- quickthrower2 4y ago
  The posted article argues against (or exposes) faulty logic, and to do this talks about cashflows but misses the simpler flaw in the argument it critiques.
nmfisher 4y ago
In your made-up example, though, the SEO may build a long-term pipeline whereas the ads are one-and-done. That’s without mentioning the mentality foisted on companies to “just show user growth in the next quarter, don’t worry about profitability”. The devil’s in the details.

maCDzP 4y ago

This was a great essay. Does anyone subscribe to commoncog - is it worth it? Compared to just getting books from libgen?

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pedrocr 4y ago

An insight I've found very useful in many areas is to separate cases where you're satisfying requirements versus optimizing. If you're satisfying, a single logical argument for a decision is enough. If you're answering the question of "How to add 10M of new revenue to this business?" there are many valid answers and you just want to test a few and land on one that's well supported by an argument. Then go execute that and do it all over again later. If you're maximizing though it's much trickier. If you're answering the question of "What's the ideal way to raise capital for this business?" a single logical argument is not enough because you often misrepresent the search space and end up doing very precise optimization of a tiny subset of options for example. A good option is to turn optimization problems into satisfying problems by specifying them more. "How can I raise capital at cost below X, amount above Y, in under Z months?" gives you most of the value of the optimization problem. It doesn't give you a general insight but it may even give you more value than that by forcing you to define your constraints properly. It's common to find that once you try to fill in X/Y/Z to even start working on hypothesis you find out not everyone has the same view. Having that discussion is often more valuable than any fancy generic optimization you could do to the problem.

lucumo 4y ago
Thank you for sharing that insight! I've often found myself doing something like that. When my natural inclination is to optimize, and the smart decision is to satisfy, having it as explicit words will help me make a decision faster.

adql 4y ago

> At first glance, there doesn’t seem to be anything that’s explicitly wrong with this argument. I agree with all the base ideas, and I found myself nodding to the intermediate propositions. The logical correctness of the argument wasn’t a problem. No, my unease stemmed from experience: I knew this wasn’t the right way to think about raising capital. But I couldn’t begin to construct an argument that went against it. The original argument could be very easily argued - you just might not have enough money to get your foot in target market in the first place and not every business can be stared by single person and some savings anymore. I don't see why author of article didn't just do that instead of pages of arrogant faffing because he got offended he couldn't invent a counter-argument to a (not only one, just one) way to make sensible business that many people succeeded just fine utilizing

IshKebab 4y ago
> pages of arrogant faffing Good description. If you have a point to make, make it!
sarchertech 4y ago
If you read the original article, the author says right at the beginning that of course some startups should raise money. The original argument was just that it shouldn’t be the default position.
- ilyt 4y ago
  Right but that makes this rambling even more pointless. It's as if author just doesn't have any sensible reasoning for his gut feeling that "startups should raise money by default" then is annoyed that he can't produce anything sensible on the topic but someone else can produce reasonable argumentation for opposite, then started giving up random examples of how not-startups companies use cash flow, and nothing there was really related to original topic on how to start and grow your startup. And all of the examples fit nicely into hard to get/expensive to get markets that need a bunch of money upfront > I’m not suggesting that there are never reasons to take outside investment. Obviously there are. But, we should recognise that doing so comes with significant trade-offs and difficulties that mean it shouldn’t necessarily be the default. that the original article suggested.

ourmandave 4y ago

Now I have the Spinners song Games People Play stuck in my head. https://www.youtube.com/watch?v=vbkg1WXf594 https://www.youtube.com/watch?v=vbkg1WXf594 At least it's not Holly Jolly Christmas.

deleted 4y ago
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ritzaco 4y ago

This is a bunch of rhetoric dressed up as logic hidden by using long paragraphs. If you break it down and remove the repetition it is basically saying: 1. the other guy made some argument 2. but he was just too ignorant to understand why his argument was wrong 3. I am smart and I do SENSEMAKING 4. therefore other guy's argument is wrong As far as I can tell, the actual first argument is something along the lines of 1. many founders raise capital and waste it because it's not "their money" so they part ways with it more easily 2. this leads to failed businesses 3. therefore founders should not raise money and the counter argument is 1. some businesses need upfront capital and the returns only come later 2. some founders can raise capital and use it effectively, instead of wasting it, even though it isn't "their money" 3. therefore founders should raise money which are both good arguments and in no way contradict each other. I have seen founders do both, and it's true that some money is raised when it was not needed, and some money is raised and then squandered, and some money is raised and used effectively to generate massive returns. That's why it's called "venture" capital.

FlyingAvatar 4y ago
Thanks for writing this. This was my sentiment as well. I feel that the anecdotes about cash flow are somewhat interesting, but the whole 'proving an argument' narrative is unsubstantiable fluff. The cash flow strategies are things which can be leveraged in specific situations, but are generally not global truths that most early stage startups can action on.
ms7892 4y ago
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ShittyKickflips 4y ago
I agree with you, got same feeling from reading. When i hear question should I raise only right answer is: it depends, what is your context? But I guess it is hard to sound smart this way :)
- Inhibit 4y ago
  Smart or not it's hard to make ad revenue (or get readers, whatever the author's going for) with a concise summary or a context heavy conversation.

mwill 4y ago

Relating to cash flow and payment terms, my company (outside of tech) has a particularly large client (rev >$2B AUD, 10k employees worldwide) that has us on 45 days EOM, but accounts team won't accept an invoice without a ref#, which are given by the "receipting team" after site confirms work is completed The mysterious "receipting team" is not in the main office, and has no phone number or even names listed, emails are never directly replied to, instead site contacts will call to relay questions/answers from them, ref# come from an automated do-not-reply email. They will quite often be "backlogged" and fail to send a ref# before the the end of the month, and suddenly will be cleared up on the 1st of the month. We've had jobs that finished in the first week of a month, been ignored for 25 days, received a ref# with an apology for the delay on the 1st of the following month, get paid 45 days end of that month. So up to 100 days from completing work to getting paid. All our accounts are POS, 7 days EOM, or 30 days EOM, and must be paid on time or we lose supply. So to do a job with $100k of materials and wages for them, we have to have $100k spare cash for up to 60-100 days It's not a cashflow problem, they're sitting on reserves and we're a blip on their radar, less than 1/10th of a percent of their outgoings So we quote them outrageously high, and they never blink. I've told them some jobs would be up to 50% less if they paid quicker, and they've outright said they'd rather hold the cash and pay more. For a sense of scale we've invoiced them about $500k a year for the last few years, they've told me to clear out a couple weeks for two jobs that are nearly that much each, in February and April this year. I can't figure out who's getting the bad deal, them or me, I keep assuming they must have some massive upside I'm not seeing ¯\_(ツ)_/¯

sokoloff 4y ago
If you can swing the cash flow, keep billing them at a rate that makes sense for your business. So many AP departments are incentivized on payment delays. Let them “win” their stupid game and just build the cost plus some extra into your rates.
- mwill 4y ago
  Yeah thankfully we can swing it, but we've actually turned down some work for other clients here and there because I've done the math and figured there was too much overlap/risk with this particular clients jobs.

JumpCrisscross 4y ago

This is a long-winded refutation of an article [1] that ignores economies of scale. [1] https://ensorial.com/2020/dont-raise-money/ https://ensorial.com/2020/dont-raise-money/

rossdavidh 4y ago

I couldn't make it through this (rather long) article, in part because a lot of it seemed to take as a given that you could predict interest rate movements. There are, probably, a large # of companies out there right now who have made keeping a large debt load part of their way of doing business, who are right now starting to find out that this makes them fragile. Nassim Nicholas Taleb, a grumpy guy who nonetheless makes some good points sometimes, said debt was a way to "fragilize". Like Just-In-Time manufacturing, it can make sense up to a point, but is often taken way further, to the point of being a bet that nothing in your environment will change.

conformist 4y ago
At least for bigger companies that doesn't appear to hold (if I understand the point)? - they can borrow at a fixed rate by issuing bonds or they can enter into a swap to pay fixed and receive floating to hedge out their interest rate exposure.

jason_zig 4y ago

> ...You could just as well bootstrap a tiny, successful internet business selling Wordpress plugins or Shopify themes, believing that ‘startups shouldn’t raise capital’. You would then never need to update your beliefs, because those are perfectly sufficient for a small, independently-run business. At the scale of a one or two person show the up front costs for building and selling your software are pretty reasonable. This setup rearranges how much cash you need up front to 1. be competitive and 2. win over new business. True this has a cap on it of say... ~1-2M ARR but that's a very reasonable game for a lot of smart people to be playing. I didn't read the original article he's arguing against, but if that's the style business they are discussing then the "don't raise" argument holds up. Frankly given the original article's conclusion of "don't raise money" I suspect they weren't focusing a post-IPO cable business...

Joel_Mckay 4y ago

It is difficult to detect auto-generated content, but it also does not preclude the possibility an author was having a stroke during composition. By definition, one no longer fully owns a company when exchanging ownership for liquid capital (often at ridiculously discounted value), or lose future well-being through debt-financing issues/predatory-scams. Note, the often negligible incremental cost of scaling tech companies often offsets the expected value in investment risk. Every fist-year student learns Bayesian statistics, but Vegas was built on those who still can't assess risk. In general, a small service site like Craigslist operates just fine with minimal overhead, and has remained functional much longer than most startups. It was really sad seeing what Silicon Valley Bank did to startup culture, and naive investors that get FOMO. Happy 2023 =)

coding123 4y ago

This makes sense to me. I am trying to build a house, and I have recently hit a funding issue. My cash flow is the problem. I want to take on more debt to get it done, but to do that makes me starve. So my solution is to get a better paying job so that my cash flow clears up and the debt is easier to manage. The debts are not huge, just lots of short term loans that clear up in a few months. Doing this without a mortgage but with lots of small temporary loans looks a lot like this. The end result is a house that should cost $300k for more like $100k.

ardel95 4y ago

I really enjoyed the article. The only thing that stood out was that the argument the author set out to dispel had a much simpler flaw. In the original argument, point number 3 (having less skin in the game leads to bad decisions) is the weakest one. That statement isn’t really a first principles fact, but at best a hypothesis. IMO, not even a good one. For all we know, having less extreme exposure may lead to better decisions, as the founder may be open to more calculated risks. And even IF true that statement doesn’t address the tradeoffs: maybe bad decisions are outweighed by the ability to outrun the competitors due to influx of extra cash. While there is certainly some correlation in such arguments, the bar for proving causation needs to be much higher than a pithy statement. All that being said, I really enjoyed the rest of the argument.

balderdash 4y ago
I agree. 1) because the company took outside money does not decrease your skin in the game (if substantially all of your net worth was in the company before a funding round, and it was all primary capital raised, then you’re still “all in”). 2) when people are over invested exposed, their risk tolerance typically goes down not up (even if the payoffs have high expected returns)
cik2e 4y ago
Great read. The real problem with "the skin in the game argument" is that it's a matter of opinion, but one opinion is more likely to be right. >> Raising capital to do a startup reduces skin in the game (you’re spending other people’s money, after all). The more likely correct take is as follows. Note that I am changing just one word. The right version: >> Raising capital to do a startup INCREASES skin in the game (you’re spending other people’s money, after all). The naïve take seems to place no value on reputation (ability to get more financing in the future).
hddqsb 4y ago
I think there is a much bigger flaw in the version of the argument stated in the article. The argument boils down to "here is a bad thing about raising capital, here is a good thing about not raising capital, therefore not raising capital is better". But there are other pros and cons that this argument is ignoring, so it is not logically correct. I also think the version in the article is an unfair representation of the original blog post (https://ensorial.com/2020/dont-raise-money/ https://ensorial.com/2020/dont-raise-money/), which explicitly says > I’m not suggesting that there are never reasons to take outside investment. Obviously there are. But, we should recognise that doing so comes with significant trade-offs and difficulties that mean it shouldn’t necessarily be the default. (I see that @ilyt already posted this exact quote.)

deleted 4y ago

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miamowers 4y ago

The issue with the original article seems like it could be summed up pretty simply, startups, for their founders and investors, aren't meant to create profit, they are meant to increase equity. Therefore having the same business model as a cancerous tumor makes perfect sense, consume as much free resources (low interest debt) as possible to grow as large as possible in as short a time as possible, independent of any external effects or moral hazards that creates. So in that way at least the original article does have a point, in a better world startups most likely shouldn't take as much funding as they do, but in the current world, the correct answer for any particular startup will always be to do exactly that.

stevenjgarner 4y ago

A fun "thought" experiment? Given the time of year (just after a fiscal quarter/year end) and given that I am a dual citizen (New Zealand and USA), I found the following demonstration particularly intriguing: a bank customer (friend) had some not insignificant funds in several personal accounts in their NZ banks as of December 31st. At 10 am on Sunday, January 1st (NZ time), it was "still" 3 pm Saturday, December 31st in the central time zone in the US. I watched as they withdrew a large amount of USD cash from multiple debit cards on their NZ accounts at some midwestern ATM machine(s), then turn around and deposit said cash into their US bank accounts. Net effect: their net worth showed accumulated fiscal year-end bank balances of twice the "not insignificant amount of funds" (according to cash methods of GAAP). They went on to hint at the fact there are 24 time zones on this planet (more actually). I asked about the legality of such antics. They said they were not sure other than any obvious fraud on using such financial statements for any fraudulent financial benefit. They explained how the daily batch processing of bank transactions hurt customers real time cash flow, and felt it was one way to rectify things to the customer advantage. Hmmmm

fiestaman 4y ago
Layman here: what are the consequences of having a net worth of accumulated fiscal year-end bank balances of twice the "not insignificant amount of funds"?
- stevenjgarner 4y ago
  On the face of it, it looks like you have twice the liquid net worth than you actually have (or more with multiple countries). Often financial statements will be prepared by different accounting firms in different countries, and each set says you had the same amount of money on hand on the same date, even though you only had one. It is not so much a delusion of wealth as a delusion of time. When people refer to a date (such as a fiscal year end), they think that date is the same everywhere but of course midnight on December 31st happens in every one of the 24+ time zones.

stevenjgarner 4y ago

I urge those interested in cash flow games to read "The Sovereign State of ITT" by Anthony Sampson.

svusa 4y ago

The example in the article of how the restauranteur halved his food costs simply by pre-paying his supplier rather than paying Net-120 (120 days after goods are delivered) fascinated me. Where exactly does the value of cash flow come from? Rehashing the example from the article: Why do restaurants pay Net-120? Suppose Restaurant R is buying 30-day dry-aged steak from Supplier S. R needs to buy the steak days in advance of cooking it to serve customer C. R receives money for the steak only after this point, and now R can pay back S. Why is pre-payment better? S can now be more efficient about the number of cows they have to slaughter. If R pays by Net-120, S ends up with a lot of waste due to unsold dry-aged steak, because S cannot anticipate the true demand but must be prepared to capture it to earn money. Analysis: In effect, S and R are pushing C to plan better. If C can just confirm that they want dry-aged steak ahead of time, which involves significant preparation, the entire supply chain can be more efficient. Sometimes, planning ahead is a benefit for C, as landing reservations at top restaurants can be difficult. Other times, C does want the ability to make last-minute decisions on where to go for food. Meanwhile, S can do something better than slaughter the cows that would have gone to waste. In essence, S has more freedom because S has more cash flow. So does more cash flow == more freedom? Cash is the most liquid asset. Supposedly, it represents the value that you can transfer immediately. I can have all the cash in the world, but if I am bound to pay a ton of debt with that cash, do I really have the ability to use the cash for something I value? That's why cash flow is a separate, and more useful, concept. One argument against "cash flow == freedom" is that cash flow can be a function of effort. If I spend all of my waking hours working, I will generate cash flow, but I won't get to enjoy anything. What about landlords who don't have to do much to earn cash? Well, cash flow in strict $ terms doesn't capture everything. Businesses don't have this problem because they can simply capture the effort for producing cash flow in terms of wages. A simple trick is to pin a cash value for the amount of time I spend. Cash flow represents freedom because cash flow = value in - value out at a given point of time. You don't even need to use USD for the "cash" part of cash flow, if that's not what you value. Then, to increase cash flow, you can 1) strictly increase "value in" (e.g. work more), 2) strictly decrease "value out" (e.g. delegate a task to free up your time), or 3) increase "value in" more than "value out" for a single transaction (e.g. take out a loan). Increasing cash flow doesn't need to be immediate: you can work on an asset and incur negative cash flow initially to establish better long-term cash flow. Worse "value in - value out" now for a better "value in - value out" in the future. It's neat to see how to apply accounting principles to optimize my day-to-day.

birdyrooster 4y ago

The most glaring and obvious problem with this model is that your customers are paying for all of your investment. If you can’t invest large or fast enough to provide benefits your customers need, they will most certainly leave. The second most glaring flaw is that the shortest path to what the customer wants does not lead to Macintosh or iPod or Watch. Big ideas need big investment before customers come around to the idea. This articles wastes too much time on its appeal to personal incredulity when the answers are so obvious.

_glass 4y ago

I love it that it concludes with what is called abduction in my field of academia. So in general you would have deduction, you reason from a set of principles, or induction, you reason from specific instances towards the principles. Abduction is like induction, but that you find a completely new type of principles, unknown before.

jldugger 4y ago

> I realised I didn’t have a good argument for why it was wrong. Every axiom and intermediate proposition were ideas that I agreed with. And it wasn’t so simple as the conclusion being flat out mistaken So... its pretty clear that time is poorly understood in the axioms presented, and the author comes to that conclusion at the halfway mark. And frankly so is risk. But nobody--myself included-- wants to read an accurate axiomatic representation of probability distributions and discount rates. But in so doing I expect that the bit about "skin in the game" would be hard to ground. The argument is that if you have 100 percent of your wealth tied up in one enterprise you are going to be very careful. Very risk averse. But what is the optimal level of risk taking? Zero? It's not a hypothetical. Especially in tech startups, projects can have wide error bars on completion time. Short runways mean you can really only pick from among the shortest options in the solution space, and longer implementation plans are discounted. Maybe thats good. But it seems like a huge shortcut to say "the shortest path is optimal."

SergeAx 4y ago

So, am I understood correctly that the endgame of cable or Amazon business is selling the company, as a whole or via IPO? And what the endgame for buyer(s) would be then?