Cash (flow) is king!

VC Confidential has a recent post on the power dynamics between VCs and the entrepreneurs they back. It is a worthwhile read for all entrepreneurs, but certainly for those that are or are considering being venture-backed.

The overarching lesson is that until your business is cash-flow positive, you are at the mercy of outsiders that provide valuable resources, such as investment capital, to grow your business. Those providing such resources to companies rightfully expect results in return so that their investment is secure and can realize a gain. If your business gets to cash-flow positive, then you as the entrepreneur have control over your destiny. If you are not cash-flow positive and need to consume more resources for survival, you do not yet control your own destiny and the providers of such resources will rightfully gain the power to make changes to ensure the success of their investment. If the latter situation arises, the entrepreneur should neither be surprise or ticked off about the changes that ensue.

I’ve heard a couple of short statements that reflect the lesson above which entrepreneurs should always keep in mind:

  • “Happiness is a positive cash flow”
  • “Most startups fail due to a lack of revenue, not poor expense control”

Neither of these quotes can be attributed to me, but I keep these thoughts with me at all times now in my entrepreneurial endeavors and share them freely.

Another interesting insight came from the post, which I’ve highlighted below:

“Good VC’s will give an entrepreneur significant room to operate, will give advice based on past experience and will bring resources or connections to bear as required. He/she will layout core principles or constraints which are important to them as well as define, with the company, critical milestones. Control is not determined by legal clauses or purse strings but, hopefully, by mutual, earned respect between them and the CEO. If law or finance is the basis of the relationship, then much has already been lost.

It is true, all of the legal terms and conditions are very important to get right. However, be sure that when it comes to actually enforcing/implementing those, it usually is never a good situation, and in fact is never a desired situation, for anyone.

The best situation is always when the fiduciaries and operators (VCs and Entrepreneurs) are operating on a basis of trust, confidence and respect. When that is lost, things by definition are going badly.

— brian

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