Sunday, July 23, 2006

Cash Flow and Speed

Good post on managing cash flow in a startup. Here's a short but pertinent excerpt.

"Even more shocking was the speed at which my business flipped from success to failure. One day I watched my bank account grow at rates that blew me away and the next, I sat looking at all my cool computer equipment deciding whether it was more important to me and my business than paying rent that month was. I didn’t have time to get new customers while supporting my existing ones and my company virtually augered itself into the planet in an instant. I shut down the company just a month or so later and ran to work at a big company to lick my wounds."

The startup I founded with my wife Lisa, Cima Systems, and the following company Lisa ran, VoiceNotify, were great contrasts in cash management (one VC funded, the other bootstrapped). With either investment model, managing cash flow was a time killer in multiple ways (time being the most precious of our resources). First, raising funds soaked up a ton of the day-to-day. Whether it was friends and family, customer funding, angel or venture capital, we ended up doing a lot of road trips and cold calls just getting our business capitalized enough for the basics (phone bills, bandwidth, hardware). Second, because of the constraints on cash, we didn't have anywhere near the time to ponder and analyze whether a decision was the absolute right one. Better to make a decision that's directionally correct over a day or two than spend a month vetting all possible options (a month of payroll and overhead was way expensive for both companies). This is in stark contrast to decisions at a larger company, where the opportunity cost for making the wrong decision often far outweighs the time investment in due diligence and analysis.

Startups aren't necessarily faster than large corporations by nature. From my (limited) experience, cash flow (and the lack thereof) made speed a prerequisite to startup success.


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