by kalonis on 12/9/20, 11:53 AM with 141 comments
by nickreese on 12/9/20, 4:36 PM
After selling our last company I was surprised that the acquirer went on an even bigger spending spree just months after acquiring us. As a bootstrapper this blew my mind.
This article helps shine a light on how they pulled it off. They acquired us for the free cashflow the company threw off (uncommon in our industry) and the leveraged that to further their expansion.
I've always looked at accounting as "backwards facing" (meaning it looks at what has happened vs where a company is going) but this article has changed my perspective dramatically.
by ihatethissite on 12/9/20, 3:53 PM
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.
First, and tangentially, it's interesting that real estate developers do this all the time.
Second, it's interesting that this article shows not only why cable companies regional monopolies are extant, but also that their continued existence relies on the preservation of those monopolies.
These and other companies that rely on a strategy of unfettered subscriber growth, in this case leveraged as a marketing tool to creditors to acquire additional debt, is no different than a Ponzi scheme. It makes the fatal assumption that subscriber growth can continue ad infinitum.
But, similar to the amount of free energy in a system, the number of potential subscribers remaining is finite. Eventually, cash flows will fail to meet the projections sold to creditors and established as assumptions in their financial models.
Thus arises a situation that remains tenable only as long as subscribers remain subscribed for as long as is required to service the debt outstanding at the time the growth stopped. Because the debt didn't go anywhere. It hasn't disappeared. Today that debt is sitting on the balance sheet of every one of America's cable providers: the direct result of a flawed line of thinking promoted by the author.
Consider the implications. To remove the regional monopolies of the cable companies is to not only destroy their subscriber base, and thus their cash flows, but also the cash flows promised to their legion creditors. Every one of these creditors now has a vested interest in the preservation of those monopolies, having themselves extended and received credit based on said promises of payment.
I propose that, contrary to the statements of the author, the proof presented by their friend is not "framed incorrectly". Rather, it shows something the author doesn't wish to see.
by bob33212 on 12/9/20, 3:57 PM
I disagree with the framing of both articles somewhat. The question should be "What is limiting your growth?" Is raising money going to distract you from making a product customers need and love? Then skip it. If being too small for enterprises to take you seriously is a blocker then you'll need to raise money.
by jpm_sd on 12/9/20, 2:24 PM
"Malone’s entire strategy was built around a single fact: that you have to pay up front for cable systems, but then earn back your money via a stable stream of cash for years and years afterwards. Notice how this extreme demand for capital drove Malone to embrace debt, over other sources of capital. Now notice how closely this resembles the Software as a Service (SaaS) business model, which is the primary business model in today’s startup world."
Gotta spend money to make money. But I wish he had commented further on businesses that do this incorrectly, based on wishful thinking. He talks about the strengths of TCI, with an engineered "loss" that saves them money on taxes, or Amazon, whose decades of "unprofitability" helped them to build a long-term-profitable empire.
But what about Uber or DoorDash? Burning investor cash, chasing long-term revenue that will never come? How on Earth are they keeping this scam going? Why do people believe in it?
by tunesmith on 12/9/20, 5:43 PM
More generally, the "flaw with first-principles analysis" is generally as you'd expect. Your premises might appear true when they're not, or your inner reasoning structure might appear valid (logical definition) when it's not, or you might be making assumptions (in the omission of other premises) that are false. It's just really hard. So that's where a slow painstaking process of repeated review will help you. And it's also not a panacea - first-principles analysis does not guarantee your solution, it's more a process that helps you surface your assumptions and learn your argument.
by munificent on 12/9/20, 6:46 PM
Now, when evaluating the pros and cons of the "should not" half, you have an actual relevant benchmark to compare to. It doesn't matter how awful an idea it is to raise capital in some absolute terms. What actually matters is whether it's worse than what you'd have to do instead.
Almost all decisions are about choosing one from several options, so if you find yourself making an absolute evaluation, that's a sort of "decision smell" that you should instead be doing a comparative analysis.
by highfrequency on 12/10/20, 12:16 AM
(Kokonas again): That’s what I said! I went, “I’ll pay you $20 if you tell me why.” And he said, “Well, it’s very simple. I have to slaughter the cows, then I put the beef to dry. For the first 35 days I can sell it. After 35 days there’s only a handful of places that would buy it, after 60 days, I sell it $1 a pound for dog food.” So his waste on the slaughter, and these animals’s lives, and the ethics of all of that, are because of net-120! Seems like someone should have figured this out! As soon as he said that, everything clicked, and I went “We need to call every one of our vendors, every time, and say that we will prepay them.”
It seems like the value to the beef vendor is not from actually receiving the cash flow earlier, but rather from just knowing the order quantity in advance to optimize inventory.
by PKop on 12/9/20, 4:23 PM
"..But I think there's a more pernicious form of failure, which occurs when you reason from the wrong set of true principles. It is pernicious because you can’t easily detect the flaws in your reasoning. It is pernicious because all of your base axioms are true...In other words, the only real test you have is against reality. Your conclusion should be useful. It should produce effective action."
reminds me of the quote by Eric Zemmour:
"When principles are in contradiction with society’s survival then the principles are false, for society is the supreme truth." [1]
[0] https://commoncog.com/blog/how-first-principles-thinking-fai...
[1] https://www.theamericanconservative.com/dreher/eric-zemmour-...
by dissidents on 12/9/20, 3:35 PM
For example, one could argue something like this: Even though increased access to other people's money can cause founders to make irresponsible decisions, raising money has other advantages that tend to offset this.
by impostervt on 12/9/20, 3:07 PM
It reminds me of a quote by the WWI French field marshal Foch - "My center is giving way, my right is retreating, situation excellent, I am attacking."
by sna1l on 12/9/20, 5:05 PM
If you had to choose a single core task for the CEO of a company, it is to create free cash flow and decide best how to spend it, aka capital allocation.
Book Source: https://smile.amazon.com/Outsiders-Unconventional-Radically-...
by jplr8922 on 12/9/20, 8:51 PM
https://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theo...
by fghorow on 12/9/20, 5:56 PM
In essence from my perspective, the axiomatic approach is like "theory" and the operational approach is like "experiment" or "observation" in the sciences.
There's a very good reason why experiment/observation trumps theory in the scientific method.
by dade_ on 12/9/20, 3:02 PM
Know your WACC. https://www.investopedia.com/terms/w/wacc.asp
by YuccaGloriosa on 12/9/20, 3:06 PM
TCI wasn't a startup. So it can't be compared to 2020 startups in this way. Because...you are starting the comparison at a different point in the companies life.
This is comparing markets almost 50 years apart. Motives and reasoning just aren't what they used to be.
TCI had assets to borrow against. TCI had a monopoly in their areas, and existing customer base. They gamed the tax system for profit. They weren't looking for over valuations from Wall Street with a view to selling out for the $$$
Ok I'm bored now
by burnte on 12/9/20, 8:28 PM
1. Startups are risky.
True.
2. Raising capital to do a startup reduces skin in the game (you’re spending other people’s money, after all).
Arguable, but not a given. Raising capital does not eliminate risk, especially if one has their own money in it, and/or are using it as a job. Just because someone else invested doesn't necessarily reduce my incentive. I lose money, time, face, and opportunity with or without investment.
3. Once you have less skin in the game, it is easier to make bad decisions. The author argues this is due to a) having a capital buffer to cushion you, and b) having more time to waste.
100% false. It is no easier or harder to make bad decisions with outside money. It is ALWAYS easy to make bad decisions, having more money simply makes it easier to make costlier bad decisions faster. Buying real estate in late 2006 was a bad idea regardless of whose money you used. If anything, having that outside money means you have people to be accountable to, people to run decisions by, and thus it's HARDER to make a bad decision.
by konschubert on 12/9/20, 2:25 PM
> Therefore: startups shouldn’t raise money.
The therefore doesn't apply. The original post makes a good argument that there is a certain detriment to raising money. But he doesn't actually proof that this detriment outweighs the benefits of raising money.
by wyiske on 12/10/20, 10:20 AM
Unfortunately I’m just a software engineer, who has never been able to put this in practice.
by peterwoerner on 12/9/20, 2:57 PM
by chris_wot on 12/9/20, 2:46 PM
Surely that is a proposition that might not be entirely correct?
by pmayrgundter on 12/10/20, 12:46 AM
If, for example, your COGS approaches half your unit price and you use BTS, you'll have almost no chance of getting your business off the ground. But with BTO your cash flow explodes.
https://docs.google.com/spreadsheets/d/15JZyPEYJxNHEWTPFmxOI...
by syntaxing on 12/9/20, 5:03 PM
[1] https://commoncog.com/blog/how-first-principles-thinking-fai...
by nraynaud on 12/10/20, 1:16 AM
by mrfredward on 12/9/20, 3:32 PM
Malone cut costs by reducing tax liability, getting better prices on programming, and increasing the subscriber base (revenue). What's that word for revenue minus expenses again?
A more honest explanation: Accounting depreciation != the actual change in value of things, and the cash flow statement can let you know when GAAP accounting isn't giving an accurate picture of success.
And about Malone's insight on leverage: Leverage ups your return on investment (when things don't blow up). Paying interest doesn't help you hide money from the tax man any better than setting dollar bills on fire would, but leverage can make big things happen from small amounts of investment.
by simonebrunozzi on 12/10/20, 8:05 AM
This is the golden line. The richest person on Earth (Jeff Bezos) followed this principle religiously since Amazon's inception (or should I say, Cadabra's inception?).
by bluejellybean on 12/9/20, 7:34 PM
by supercanuck on 12/9/20, 6:31 PM
The reason to to take the money now from venture is because it is more valuable now than it is later. The way this author is describing this though reminds me of the folksy, whimsical way some business books are written which makes this article so applealing: e.g. The Goal, How to Win friends and influence people, etc.
by BonnieBrown on 12/10/20, 4:53 AM
I just happened to be trying to learn more about David Friedberg before stumbling upon this article and I watched this lecture he gave on entrepreneurism which I think complements the contents of this article incredibly well. Highly recommend for those looking to learn more
by anonymousDan on 12/9/20, 11:48 PM
by monkeydust on 12/9/20, 11:11 PM
by root-z on 12/9/20, 5:34 PM
by solatic on 12/10/20, 8:39 AM
by SerLava on 12/9/20, 10:59 PM
The only correct conclusion from those axioms is:
There are advantages to not raising money.
by zuhayeer on 12/10/20, 2:59 AM
by tuatoru on 12/9/20, 11:56 PM
the problem with the argument from first principles that the article attempts to refute, is that the "first principles" given carry an implicit assumption that the minimum viable product is a a null product.
If in reality the mvp or, later, the infrastructure for growth take more to create than the resources you command, you need to raise capital.
The "first principles" also ignore time to market and competitive pressures. They are more "spherical cow on a frictionless plane" principles than actually useful ones.
by 2Gkashmiri on 12/10/20, 2:30 AM
by JackFr on 12/9/20, 3:38 PM
by knighthack on 12/10/20, 2:36 PM
by blackrock on 12/10/20, 3:39 AM
But some problems can only be solved with VC money. Because of time limitations.
You may only have a small window of opportunity to capture a certain market.
If you grew linearly, and built up product idea A, in order to fund product idea B, in order to fund product idea C, then by the time you’re done with product idea B, a decade may have passed by. You’ve also grown older, and may not have the energy of your younger self anymore.
Also, a competitor, one with a larger funding pool, may have jumped in and captured that market, right in front of you.
by TameAntelope on 12/9/20, 9:13 PM
I didn’t understand the value of either until this article, but they seem related.