Cash vs Flow

If you have a startup and have never been an executive in a business with significant revenue, I’d like to bring something to your attention. The difference between having cash and having cashflow.

In the world of startups, raising a round of funding is a celebrated event. Cocktails, good vibes, something positive was achieved. And make no mistake, having someone(s) back you, believe in you, give you money and say out loud to the rest of the world “This guy/girl/team rocks and is going to kick ass!” actually helps. The support you may receive from the investor can help too.

Funding as a positive event is not a scarce narrative. There are a ton of investors, many with good and pure intentions, who blog about startups, provide advice, data, inspiration – but the business they’re in and their world-view is based on the assumption that startups should raise money and the good ones should raise money from them.

What may be undervalued – and this is why I’m putting keyboard to screen – is cashflow. If you’re a finance newbie, cashflow is the simple concept of a business bringing in some cash every month, minus expenses with a running total of cash-on-hand.

Cashflow is a funny thing. Firstly, it happens over time and so you can’t measure it as a single pile or event. Cashflow isn’t “we just raised $200,000”. Cashflow is more boring. It is “we’re making $10,000 a month, projected out over 24 months in a spreadsheet, minus our burn rate which gives us net income discounted into todays dollars if-you-really-want-a-number-right-now”.

It’s less spectacular, less champagne, less positive reinforcement from a famous investor, but the one thing that makes cashflow different to a round of funding is that it is the flow that keeps on giving. It’s the spring that never runs dry. Cashflow will be there 2, 3, 5 years from now and unless you screw it up, it’ll have increased.

Create a basic spreadsheet. Make the columns your months. Create rows for cash on hand, revenue, expenses, net income.

An initial investment of 500k with burn rate of 30k and you run out of money in 18 months. That’s with no big capital expenditures, and you will have those.

Add just 15k of revenue and by month 24 you still have $155k cash on hand with runway for about 33 months total.

Consider that with $15k in revenue from month 1 you only have to raise half the amount of cash to have the same runway. That means, assuming you’re a good negotiator and deals scale linearly (which they don’t) you could end up only giving away half the equity and control you otherwise would have to.

But this is all basic arithmetic and not really that impactful until you consider that when your cashflow reaches breakeven – and I mean not just ramen breakeven but where you can pay your team market rate salaries, your runway just got extended to infinity.

You don’t have to find some buyer to hopefully purchase your unprofitable team in a talent acquisition which is really just a signing bonus for everyone.

You don’t have to raise any money, ever again. Unless… you raised a round when you started out and your investor has invested in 20, 30, 100 startups and one of them needs to become the next Google or the investor fails.

If you can achieve cashflow and reach breakeven without raising money, you are a golden business god in charge of your own destiny with infinite runway and total freedom. Breathe deeply, you just won whatever that fancy Quiddich prize was in Harry Potter or some similar metaphor.

If you raised money and your investors need a big exit, well, it doesn’t matter that you’re making some cash and are breakeven because you’re going to have to go big or go home and so go out there and raise another round because without it, you are a breakeven business with infinite runway and very unhappy investors.

So where am I going with this? If you raise money from investors who want HUGE, know that you’re on the wheel: The hamster wheel of growth and funding. You have a finite cash pile, you can extend it with cashflow but even if you reach breakeven, you may still be considered a miserable failure. You have to go huge or go home.

If you are somehow able to self-fund by, say, not eating for 2 years and living under a toadstool, and you are able to generate cashflow and reach breakeven…. the world becomes your oyster because you now have a business that you control and all pressure to sell, raise money or do anything you don’t want to do is completely removed. You are in a new world that few actually get to experience. You are in the world of infinite runway, infinite possibility and total freedom to choose your own destiny. It’s… amazing.

There is something about being in this place, this condition, this state of zen and breakeven cashflow, that I think is very good for businesses and may empower them to actually become big businesses. Firstly, you had to get there which is one hell of an education. It’s as real as it gets. You just created breakeven cashflow without a ridiculous initial cash infusion. You and (if you have one) your team did that. They don’t let you do that in business school. In business school they just try to emulate that happening and give you a degree and hope you’ll figure it out on your own.

Secondly, with all that learning, new knowledge and business instinct that has been forged in the fires of Mount Doom (The Mount Doom of negative cashflow), you are now in a state of infinite runway, relaxation, zen and infinite possibilities.

Someone wants to buy you? “No thanks. We’re just chillin, building the next Facebook.”

Got a project that will take a few months? You’re no longer a girl or guy who jumped off a cliff and is trying to assemble a glider before you hit the bottom.

Since you’re actually generating cash, you clearly know a thing or two about making money. Going from zero to breakeven (market rate salary breakeven) is insanely hard. Going from there to 20%, 50%, 100% or more increase in revenue is a lot less hard. Just do more of the same thing with more customers, more efficiently and…. hey look! You’re self funding now! In fact your growth trajectory that took you from zero to breakeven may just naturally continue past breakeven and onward.

I remember how hard it was for Kerry and I. We raised $450K and that seemed like a lot of money back then. We took tiny salaries and then tinier salaries and then salaries you could measure in planck lengths. Then we burnt through all our savings, and that was just the beginning of the negative cashflow free-diving experiment we did. Think you’re good at holding your breath? Try running a money-losing startup for years. We managed to create revenue spikes, but they would go away quickly.

Then eventually we were able to generate growing cashflow and everything changed. We both had post traumatic stress and I think it took a few months to sink in that we had a growing business on our hands and it wasn’t going away. Then we started hiring with our new cashflow and kept growing. The learning trajectory was steep too. Every now and and then we would look back to just 2 years previously and laugh at our ignorant selves back then.

When we raised back in 2008, we had a rather unique conversation with our investors about organically growing the business with it’s own cashflow and we structured a deal that accommodates that. So we’re not in a position where there is tremendous and urgent pressure to become very big very quickly or risk the board firing us. And yet, strangely, the business is growing and is now approaching 30 people with no ceiling in sight. We can breathe, we can see clearly over the horizon and we have plotted a course to become a much larger business using our existing strong cashflow.

Breakeven and beyond is a different world, it is very hard to get to and if you are a founder and are just starting out, I truly hope you will get there too, because once you have a business with breakeven and then positive cashflow, you will begin to truly enjoy being a founder, innovator and entrepreneur.

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