Hi everyone – it’s been a while! I’m feeling an urge to write again, so starting with an easy post, rehashing something I’ve already written about! Cashflow.
I initially wrote the article almost 2 years ago, but the principle of ‘Cash is King” is a timely article, as we could be hitting a rocky period over the coming months – unforeseen situations mean you may need to adapt and change plans. The last thing you want to do is run out of money! Growth startups in particular may need to be wary where aggression and targets applied from outside forces may confound things. Hopefully this article serves as a reminder for all entrepreneurs to maybe take a hard look at their worst case projections and whether cash flow is good enough to adequately operate.
Ed note – not taking away anything I’ve written below, defining cashflow is a rather murky business. Thank you ‘accounting’, much appreciated. Have a read at the economist – https://www.economist.com/finance-and-economics/2020/02/20/the-appeal-and-the-flaws-of-cash-based-accounting
Case Study: Raising $1bn and why cash is King
One of the first articles I wrote was about the importance of personal discipline. The same is very much applicable for a startup or more plainly to do with the need of staying in control of cash and your costs. Cash flow is still one of the biggest reasons why startups go out of business; not just early on but throughout all phases of their life.
I use Airbnb as today’s example. A few weeks back their latest round raised $1 billion on a $31 billion valuation (total money raised around $3 billion). It was allegedly profitable too in the second quarter of 2016. It was hoping to use the money to expand more globally. All well and good, but let’s try and think through the implications.
Why we need cash
The most likely reason for raising money is because the company wants to aggressively expand further. They need/want to expand at a capacity greater than their profits allow. This is pretty much the reason why Venture Capital exists. But what one needs to balance is the need for funds to expand and the relative health of the company. Personally I find the best measure of this to be cash flow. Cash flow is still one of the biggest reasons why startups go out of business; not just early on but throughout all phases of their life.
But it is very difficult for us to tell if Airbnb are also suffering from a cash flow problem or not; one of the downsides of non public companies is the lack of transparency.
Unexpected costs can also be factor. In Airbnb’s case I reckon legal fees have become a bothersome issue. We have some cities regulating the number of days landlords are allowed to use Airbnb, hotel chains finding ways to make life difficult and even a rental contract company is blaming them for tenants breaking contracts. All of this costs money, and a fair chunk too. I assume some of the money raised is put aside to cater for unforeseen lawsuits!
Expanding with a social problem
Let’s assume the majority of the money is used for furthering expansion. Airbnb have another (acknowledged) problem on their hand. An image one. Actually a fair few companies are in the same boat (Uber being another example). There are reasonable doubts whether tech companies are causing more social harm than good. In Airbnb’s case are they the direct cause of a housing/renting crisis as described above in big cities? There is no doubt that the arrogance displayed by some tech companies has meant people have turned on these once darlings. Especially in lower income communities.
This should also make us question if Airbnb really have their act together in controlling their operating costs. With many bumps in the road, ‘aggressive’ expansion can mean excessive waste as the organisation grows yet cannot fulfill their aims due to holdups. In this scenario we have a bloated and slow moving company. Having tons of money in the bank can make us believe we are extremely liquid and agile, but it should not be a license to forget about our need to keep costs down.
In closing it’s worth remembering, you maybe worth $31 billion as a company, but that does not make you impervious to the basic ideas of a startup. Namely that cash really is king.
Let me know your thoughts in the comments!
Article originally published April 2017 here – https://junaidrahim.com/2017/04/03/case-study-raising-1bln-and-why-cash-is-king/
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