> Most useful article I've read probably this year.

Agreed.

I didn't really care about the should you / shouldn't you raise money part and the whole first principles thing, but the middle half of the article gave me a lot of things to think about and I am guessing I will be checking out the other content on this site for the next while.

The Accounting department is usually backwards facing. The Finance department is usually forwards facing.

If you liked this article, you might like the book The Goal or its application to the “project context” that software companies find themselves in, Critical Chain. They define a lot of business thinking as being focused on controlling costs, when in fact you want to first maximize revenues, and the kind of funky idea of measuring “dollar days” that one eventually gets to is an attempt (which I actually don't think is successful, but maybe it is approximately okay) to start to bring cash flow ideas to consciousness.

I believe The Goal is where I first read about this idea about cash flow being more important than revenue, in a way that can be easily explained to anybody: you have bills, you have a certain amount in the bank, and then you have in accounting a set of invoices that you have sent out to customers but they have not yet been paid. So that money is “as good as earned” on paper but it’s not yet in the bank. And the problem is not revenue, the problem is cash flow. If you don’t have enough in that bank account, then after paying for your materials and rent for your building and whatever else, you suddenly come up short on payroll. “Please forgive me,” you tell your employees, “we have the money and your paychecks will just be a week late, we are so sorry, this never happens normally.” Good way to lose a lot of your best minds that really make your money—your best salespeople, your best engineers, your hardest workers. They got rent to pay. In The Goal I believe the book points out that most companies that go under don’t have a revenue problem but a cash flow problem, the money isn’t coming in fast enough to pay to keep the company running even though it is coming in eventually.

there are a couple of other ways to look at it that may be helpful to the broader community, one of them is that your interest rate on debt actually sets a time scale for your “indefinite future.” If you have credit card debt at 36%/year compounded monthly that’s 3%/month, flip that to (1 month)/(.03) = 33 months. Now if I ask you “hey, how much is that $20 per month subscription worth to you in terms of present value?” you can answer: that subscription runs out into the indefinite future so it gets multiplied by this time scale and it is worth $660 to me right now. Which is another way to say equivalently that if I bought something right now for $660 I would pay $20/month for the indefinite future. Lots of people don’t realize how much present value they can unlock by just canceling out old subscriptions like that, because the cash flow is not there immediately, but it’s true.

Similarly, I ran into cash flow issues at the beginning of this year in my personal finances. With COVID-19 hitting at around the same time my auto loan asked me if I wanted several months deferral. Are you shitting me right now? Yes, the added productivity and lack of stress from having a floating several hundred dollars in the bank and therefore being able to set up auto-pay (and not incurring late fees on all my accounts) pays for itself and then some. Thank you so much! (Of course the bank is a bank, this is cold hard calculus to them, so I don't feel too bad. Imagine that, too, though! Imagine that if you are in a good cash flow position, as the bank is as covid starts, your reaction might actually be to turn away cash flow: you are a sort of landlord collecting rents and you need to mitigate the risk that all your tenants go broke, they need to be able to keep their jobs for your wellbeing. And then you think of the actual landlords and you realize that the system must have left them relatively strapped for cash if they’re not similarly absorbing some of the shock. And that launches into interesting questions about feedback mechanisms in complex systems and their modes of resilience.)

I don't think he's presenting a dichotomy at all, false or otherwise.

To paraphrase heavily, he's delving into the fact that these are simply different things. Profit, free cash, EBITDA, etc. These have different implications. Particularly, they translate into capital very differently. Ability to borrow. Ability to raise equity. Pay dividends. This translates into radically different trajectories and outcomes.

In 2020 terms, you might also include growth rate, MAUs or the current trendiness of the startup. This also, essentially, translates into real world effects. Big ones.

Most people, including many "business people" don't quite realize the implications of a positive or negative float. The difference between a -20 day float to a +20. With a positive float, growing itself is cash generative. With a negative float, growing is cash consuming. A business might grow, produce less profit but more cash.

Outside of accounting, there's a tendency to dismiss this nuance as trivial and convergent in the long term. In reality, the future never comes. It's always the present.

There are some flaws within your argument that i like to point out.

> why cable companies regional monopolies are extant, but also that their continued existence relies on the preservation of those monopolies.

it's a moral judgement about monopoly that you imply (it being bad). But the article makes no such judgements at all, and that by bringing in this you direct the argument towards one of ethical behaviour, rather than logical deduction and application of such for businesses.

> no different than a Ponzi scheme. It makes the fatal assumption that subscriber growth can continue ad infinitum.

That's not the defining feature of a ponzi scheme - which is that it is using the investment of new investors to pay out existing investors (and only doing so, rather than undertake a business). The cable companies _do_ produce something, that of cable provision, maintenance and services. Even if they assume infinitely growing subscriber base, it is not a ponzi scheme.

And growth doesn't have to be ad infinitum - just large enough to last long enough until the next disruption (e.g., starlink might disrupt cable companies). There's nothing wrong with a company dying - the bag holders and creditors who hold them last will lose out when they are disrupted, and this is a good outcome. Investment has risks, credits has risks.

Yes, I've thought about this too. But almost all successful businesses eventually go under[1]. Whoever was holding the potato last gets an egg on their face. That doesn't mean that the business was a "failure" though. It succeeded wildly during its heyday, making livelihoods and sometimes fortunes for many people, employees and shareholders alike.

I'd love to read something more about this line of thinking from someone more knowledgeable in the area.

[1] I think, but maybe not! It would be interesting to trace the "capital lineage" (made-up term) of various successful businesses from the late 1800s through today, for example.

> Making a profit requires cash flow management, but managing cash flow does not require making a profit. This article does talk about managing cash flows in a way that involves never making a profit.

Isn't the exact opposite true?

I work with businesses which import goods and sell them. The vast majority of these make a steady profit without any thought to cash flow management. Accounts receivable are a mess, payment terms are long and they have a lot of cash tied up in working capital - but they are making enough of a profit to make up for this.

In contrast, you can stay in business making a loss with clever cash-flow management, but not forever. Equity will decrease year over year, and new sources of cash (lending, selling shares) need to be found to finance the continued operation of the business.

Is Starlink about to make cable TV and satellite TV obsolete?

Musk definitely understands the importance of (incoming) cash flows. Being paid upfront for functionality that may or may not be ever available is genius.

Edit: /s

Similarly, he doesn’t want his space ships to be in transit or grounded for repairs for a long time because that represents inventory.

There were some old ideas about how an interplanetary civilization would work, and in particular shipping, and now I understand better why we are still stuck on the ground. We are a long way from having ships so cheap that we can have them just floating around on ballistic orbits.

"What is limiting your growth?" is a myopic view of this problem. An injection of capital provides runway at a minimum and leverage in many cases regardless of a company's situation at nearly every stage. Your suggestion of "growth" as the metric to be maximized is the main issue. If an enterprise wants to generate maximum short-term profits for the owner, establish a large market share initially, or generate maximum cash flows long-term, each presents a very different view of when and how capital can solve problems.

This is an important point. For this to work, step 0 is: have a functioning business. That’s what gives you the opportunity to then change the curve on your cash flow.

Another factor is your vendors. The cable business expanded (and expanded into) an existing ecosystem: tv mfrs, film studios etc. The restaurant already had vendors it could afford to lend 300K up front knowing that they would deliver reliably over the next four months. Also an operating business.

Likewise Amazon.

But the Ubers etc start without a viable business. In fact they start by skimming the cream of an existing market. The problem is, you get good at what you do. If you don’t build a viable business it becomes harder and harder to move your company into that mode as the environment changes.

I think it's harder to draw the line as to who's doing it incorrectly than it seems, without the benefit of hindsight.

Give an example from the telecoms world - I had a friend who worked for a telecoms startup, bootstrapping for funding and undercutting the local incumbent by using better technology. The incumbent responded by offering free service for a year to all the startup's customers if they switched back. An unsustainable move but hardly a bad decision - it had very deep pockets, and my friend's employer ran out of money first.

If Uber didn't have any competition, it could raise prices to profitability today. Investors still believe in it because they believe that Uber, like the Telecoms incumbent in my anecdote, can bankrupt the competition and then have its way with the consumer. Investors in Uber's competitors presumably have their own reasons for a similar thesis.

I forget where I read it, but some article described Uber's business model as "sell a dollar for 80 cents". You get a LOT of customers that way, and report huge growth, which brings in investors, and everything is great - until the pyramid scheme collapses.

Uber or DoorDash are just extreme examples of the same line of reasoning. You're just moving cash flows not only across time but based on probability. You start by trying to create a business that moves the most cash possible to generate float. Now you might say, that this doesn't work because if you sell $1 for $.80 you'll run out of money. But that's not true, you just have a drag on your timeline that pulls you to zero without further capital inflows, or until you sort out your margins. In a world with very low interest rates (now, and past few years), capital doesn't have many useful places to go. And as we've seen, it has flown a lot into equities and a lot into private funding. That is the inflow of capital that keeps extending Uber and DoorDash's timeline, such that even with a 20% drag, you still have another fool to pull in and keep the party going. If the music stops everyone cries, but if it keeps going long enough, you actually increase your chances of remaining alive. For one you might outlive your competition, but there's many more things that can happen. You can improve your margins (Uber's pipe dream with self driving), you can can have a shift in consumer demands in your favor, or a pandemic that shifts consumer spend super fast, etc. You basically keep growing and extending the timeline and you may get a big pay out.

Or as some would call it, growth investing.

DoorDash is interesting.

Sure they don't have subscription like predictability for their revenues. But they have a lot of data, and machine learning, so they may get pretty close in predicting how many people will order steak next month.

And let's say they partner/own a chain of ghost kitchen restaurants who offer a large variety of food(which is a much more competitive business model than restaurants). And that chain can suddenly get steak(and the other stuff), for half the price ?

> Why do people believe in it?

Amazon FOMO.

Investors are so butt hurt they didn't believe other investors about Amazon's razor thing margins and now its a 1T company.

I think Uber/DD are VERY different though. I don't see the potential either.

Agree - and a related is that because you don’t have 100% ownership, you have less skin in the game. The reason to tkae money is that you believe that the 80% of the company you still own will be worth more than 100% of the company without funding. So you end up with more value at stake, not less. And more incentive not to make bad decisions (and of course more people around the table with skin in the game that are motivated to help you avoid bad decisions).

IDK... In theory, choices are good and you can just choose the better one. In practice, the financial dynamics of a business tend to create head or tail wind forces that become a part of the company's character.

All else equal (including the decision maker), a positive float business will tend to be more growth oriented than a negative float business. In theory, not so much. Float is just a type of capital (working capital). In practice, it's different.

Other people's money businesses will tend to take more risk. Publicly listed companies tend to be risk averse and quarterly report focused. These aren't carved in stone. Some publicly listed companies (eg amazon, tesla) have sailed against this wind. But, the wind is still there.

For a personal example, take the difference between having a trainer vs exercising yourself. It's theoretically possible to do the same training and have the same results, or do better. The tendency though, is meaningful, and when you pay a trainer there's a tendency to be disciplined.

Returning to the "friend's argument," it is observably true that structural constraints affect business owners.

Yes, I found a flaw right away.

Not all problems that startups are solving are equal. If you want to build a Tesla competitor you're not going to be able to do that without raising money (unless you happen to already be a billionaire).

If you are building an app, yes the author may be right sometimes, where you can often find product market fit without the need of a large influx of cash.

Part of the reason is because it's a set order. Consider that in pricing his beef normally, the vendor has to account for three things:

1. Beef that sells within 35 days at regular price 2. Beef that sells within 60 days as a discounted price 3. Beef that sells after 60 days for a loss.

The beef's regular price has to be somewhat higher than in an efficient market because some of it will be sold at a loss.

Getting an order for a set amount per week allows him to disregard the losses he normally has from beef that has to be sold for dog food, because the purchaser is guaranteeing their quantity, smoothing their expectations on how much beef to purchase in the future.

It's possible that at $18 a pound, without any waste, he's making the same margins/profit as he would at $34 with some waste.

I assume the beef vendor doesn't have much cash on hand. So he can take the prepayment and give it directly to the cow farmer who also doesn't have a lot of cash and is happy to prioritize the preorder.