In this market environment is it better for an Internet startup to take as much cash as possible or stay lean?
Marc Andreessen recommends they take as much cheep money as you can approach whereas others like Guy Kawasaki argue that the cash heavy venture capital model is broken and suggest you should sip on cash
Answers (158)
Rakesh V
Director, Prosares Solutions (http://www.prosares.com) - Sharepoint | Business Intelligence | ASP.Net
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Jon,
I think the answer lies somewhere in the middle. Eventually, any viable business needs to be "financed" by the customer. The startup needs to pick up just sufficient money to be able to reach that stage and no more. There are pitfalls of too much cash and "cheap" money may really not be all that cheap as many ventures have discovered.
Christopher F
Computer Networking and Operating Systems teacher and Technical Support mentor
An interview with Joel Spolsky in the ACM Queue magazine (July 2007) had some comments on financing a start-up. Joel started a successful software company, Fog Creek, in New York City, and in the interview he comments on the financing options chosen in the early years. See http://www.acmqueue.org/modules.php?name=Content&pa=showpage&pid=497
Also, there are some practical but rambling hints about good practice for web-based software startups in a publication by the principals of 37signals at http://gettingreal.37signals.com/
Hope that helps!
Regards,
Chris Freeman
If you are going for the homerun (and not everyone is), then obtaining "cheep money" today is the way to go before things start tightening up. That gives you the best chance at the biggest payout but also puts you in the most likely scenario of flaming out.
Personally, I think building a viable business model on solid revenues on as little cash as possible is the better way for most entrepreneurs to become successful. As a cash-tight company, you are most likely to focus on the one or two most critical things your customers need and to execute those exceptionally. That, I believe, significantly increases your chances at growth and creating a solid venture.
Max H
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Depends on the person. If you're a Marc Andreessen where people know who you are, then you can pretty much go and do lots of things by merely being there. But if you're a "no name" with an idea or a beta product, then I would surely go with Guy's argument.
For Marc. it is easy to say his statement. For his new venture Ning, it is merely using his name, a product (like social networking) that works and applying that to get critical mass. So, the cash that is being burned is heavily based on advertising and such. Basically, the missing piece are the "customers". This is where many people burn their startup cash anyhow. But the question is where is the "innovation"?
But for all the other startups that don't have that "name credibility" or a product that has been proven or even a single customer, it's gonna take a lot more "sweat capital" until we start looking at burning venture money. There are too many variables in this equation to be able to succeed. So, the idea has to manifest itself into a technique or a product. The "wow" factor is in the value it brings to consumer.
In the end, it's much better to "build" versus "buy" when starting any company. If we look at companies who succeeded tremendously as entrepreneurs (like Bill Gates or Michael Dell), we learn that they were all technicians (with "talent") at some point in their rise. People who buy assets like IAC/Interactive can do so because they have access to a network of high net worth individuals. But in the end, these companies are not the "drivers" of the Internet economy.
As a final assessment, one should be sure to understand what resources s/he has available to him/her before making a leap to burning lots of cash. Many businesses fail because they miss one or more of the key elements. And looming over the cliff is "bankruptcy".
The sip cash model assumes that the investment market stays fluid. If things get tight like 2002-2004. Right now there are perhaps too many investors chasing too few good deals, so cash is relatively cheap.
Raising cash is also a distraction. James Currier also has a point about "Hitting It Hard" and not wasting time raising money when execution is more important. The video is up on the STIRR news blog:
http://blog.stirr.net/2007/09/14/the-talks-from-founderhacks-ii/
Links:
Ed B
Technical Marketing & Business Development Professional
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Jon,
I fall into the "little cash" camp. There are many internet startups that require little more than a couple cheap computers and a decent server hosting service, nothing more. I couldn't have said it better, take what little cash you need to grow organically on customer revenue and that's it.
If, for reasons not mentioned here, you need a large cash infusion to get started, give considerable thought to your exit strategy. How will you compensate your investors (Angels, VCs, friends, etc.) and when? Are you going the M&A or the IPO route? Will this cash go to SG&A or to compensate an algorithm-wielding scientist?
Lastly and perhaps most important is your startup idea defensible? Can you create large entry barriers against your competition? For how long? Will you have competition? (This is both good and bad.) All of this should impact your decision whether or not to seek out cash.
Cheers and good luck!
Ed.
Jon-
As an Entrepreneur who started his own company using only the cash from a second mortgage, I'd recommend taking what you need vs. taking as much as you can. Moreover, its very dependent on your situation. If you are building a company to flip in 2 -5 years in need to garner marketshare to maximize valuation then more cash is better than less. If you are building a company that has long term plan, then less is better because: 1) the cash will spoil you in the sense that your company won't build a model for profitablity until you run out of cash and at that point (like many saw back in 2000), you won't have a model at all; 2) Control is the ulimate part of the equation. If you enjoy what you do, can control the direct and do not have to cowtail to the money, then the rides is so much sweeter. Wait til you go public to be enslaved to the money guys... at least then you'll have plenty in your own account to justify selling thy soul.
It's impossible to answer the question in general terms. There are three factors to be considered before answering this for your situation.
1) It's not an issue of cash, it's more an issue of dilution and control. If I could raise $20M for 5% of a startup right now, I'd obviously do it. But, it should be clear that giving up control early is always a mistake.
2) If you had the financial discipline, it reduces risk to take more cash, if you don't have that skill, then taking less cash reduces risk. Be honest with your yourself, know your weaknesses. Ask your wife/husband if she/he thinks you know how to spend money wisely. Spouses usually know the answer better than you.
3) It depends on the cash needs of the business. Some businesses don't need a ton of capital, some can borrow against receivables earlier than others. Run the projections and decide that for yourself. If the business needs so much money, that you would loose control after raising your first round, then don't start that company.
- My 2c
I'd like to emphasize Danny's answer #2 above: if you can get the cash now while it's cheap, then get it! But *only* if you can resist spending it unnecessarily. Having a big cash horde is great when it's needed, but for the first couple years of a startup, growing too fast will hurt you, not help you.
I learned this in my last startup where I think we took too much financing too soon, and suffered for it - not from dilution (there was some dilution, but it was fair), but from growing too fast before we found our niche.
Ray M
Energy expert, educator, award winning sculptor
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Having enough cash on hand is one of hte biggest challenges in a startup.
As long as people are not going crazy with it, borrow what you can to leverage your business forward.
Take as much money as you can before it becomes unavailable.
From my experience, it seems that a little of both is a good thing. Although, I personally prefer the cost-effective approach on an on-off pattern in the long run. Yet time has proven as for most things, it takes time to build a strong and stable company that can withstand the turbulent effects of a modern day economy. If your company is lean during times similar to present day then when the going is good you'll be able to better manage and expand your company.
it deppends
take as much money as possible, when things get tough (and they absolutely will) then you need as much money as possible to bridge you across to the next phase in your growth as a business
Suresh R
Head, Antispam at IBM LotusLive iNotes
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Take just as much as you need to get off the ground and operate without scratching for money for however long you expect your project will take before it goes live, and then runs for a year or so to come out of the red on its own merits (build an active userbase etc)
Feel free to add a comfortable margin - cost estimates have a way of going awry. And DONT ever take too much cash. It lets you get complacent and lose the hard edge you will absolutely require in order to get off the ground.
Silly Valley is littered with defunct startups that took too much cash and then dotbombed, and this new web2.0 boom is producing even more such. They say history repeats itself - but is stuff that happened a mere five years ago "history"?
I should imagine it would be most beneficial to act with honesty and integrity at all times
Stay lean, given the uncertainity in the general business grounds I would imagine it is better to play safe till you (as a business) identify your place in the market. At that point you are better off fattening your wallet.
Anita P
Marketing Manager, HP Software + Solutions, South Africa & Africa
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Hi there Jon,
I share JC's view, keep it lean, grow organically, minimise risk.
Anita
Subbu I
Director of Innovation & Global Strategic Accounts at Steria
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Each business model and business situation is unique and cannot be generalized. Yet, if your question begs a general "thumb rule" answer, then it is always a better strategy to stay lean in a B2C model and not such a good idea in a B2B model. Coz, in the former, your volumes are not dictated by your capability alone. In the B2B model, you have to spend in order to demonstrate and distribute your capability...else you don't have a business.
Again, as others have opined - "it depends" (on the type of internet venture):
Infrastructure heavy companies with an Enterprise Model need to be capitalized enough to see them through the "chasm" phase, where market acceptability is still a factor - for an "innovative" idea - from experience
- Direct to customer models have had a relatively less need for cheap money as consumers do not mind paying a few dollars for a useful service which atleast coves for the infrastructure cost in teh initial phases - what with the falling cost of computing and the marketing itself being "over the web" - from observation
Abhinav M
Experienced Telecom Professional, Visionary Entrepreneur and Strategy Consultant.
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They say that you should take cash when you are getting it and not when you need it.
Especially if it is cheap. The supply of cash changes with time, and if you go after it when you need it, you might end up with a bad deal, invariably this is bound to happen.
Howevery, the deployment of cash has to be extremely sensibly done and you should not take it if you are generating much more cash than you need in the 2 year horizon. At that time you could go public.
Do both - Take as much cash - hedge it and then stay lean - Build your model of profitability from day 1. It always pays to have enough and more cash cushion.
You need enough start up capital to se through the costs of business until you can break into profit, and run on the income, this period of time has to be strict, if a company can not support itself after this resonable time, then it is a floored business.
So to answer the question simply. you need 2 types of cash:
1-Initial start up cost's, purchases, deposits, expertese etc.
2-Runing cost's, Rent, wages, advertising, materials etc.
Start up costs can be offset to the future, but month by month, running costs should be eventually fully paid by the income, and as the income improves, the start up, and cost's covered in advance of income should start to decrees.
The problem with taking "too much money" (and is hard to know when it is really too much) is that it makes the entrepreneurs and the initial management more relaxed regarding reaching their goals on time as they could bought extra time with their reserves. I have seen startup companies take more employees than they needed just to build a burn rate matching the money they got to show their investors the investment required was the right one. This led to chaos and inefficiency, loose of focus and at the end to failure. As I wrote at the beginning, the problem is: understanding what is "too much". And when some VCs influence the entrepreneurs to get more so they can match their investment strategy, it can lead to that direction....
Achal K
Entrepreneur & Visionary
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The most important aspect is business model, money is never an issue if its commercially vaible model. Cash is always good, if its in perfect ration to make it just a friction free operations.
Mamta N
Founder of an IT company AAshmam with focus on research and development
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Jon, too much of anything is harmful. Too much cash in pocket in the start will give a relax mind for sure and one can really focus on technology but than your mindset will always be towards technology invention and looses the focus that goal of business is MONEY MAKING. Have enoght cash for things to start rolling and then fly.
I recommend get as much finance as is imperative for the startup to 'start-up' and get going. Like in most cases there is a thin line in between and the wise always strike a balance between the two worlds! Getting too much cash or for that matter more than what is required, has its own pitfalls!
I think this is a very good option if you want to get a start up and from home only you can impact in the Global market and where you will get ample number of opportunities open for you. Here we can better use negotiation and getting good chance of growth but offcourse having a more competitive environment.
Sanjay C
Former GM Global Business, Reliance Communications
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Yes, it will be a good strategy to get funded to the extent possible.
The required cash sticking to spend as you grow policy can be used for fueling expansion as moderate pace while excess cash can be invested to get better return from the capital market as they are still showing healthy run
As they say, "Its the product, stupid!". If there were a universal answer to this question, things would be simple wouldn't they? You wouldn't have scores of failed businesses and a minority of successful ones. If your product is good, if you've had the opportunity to validate it on a market of users while remaining lean, there obviously comes a stage when you need to move to the next level. The wisdom lies in understanding where that level is, when your product can't do without a significant cash infusion to move forward and current internal accruals aren't enough to get you there eg. you released a beta app on a lean development model, there's a surge in demand for your app/service, but you need to hire specialists and developers to fine tune and scale it, clear bugs, go in for reliable enterprise level data hosting, etc.all at once.
