Cash Flow and Destiny
If you are an entrepreneur, you have probably heard some crusty old CEO or investor say something like “cash is king.” You probably read the Twitter S-1 and thought to yourself: “What the hell are those old guys talking about?” Twitter is still burning cash six years after founding and they, not cash, seem to be king.
Wait till I get my money right
Then you can’t tell me nothing, right?
— Kanye West, “Can’t Tell Me Nothing”
In a situation such as this, I usually just say to myself: “That’s the problem with wisdom, you can get it, but you cannot share it.” But this particular nugget is so fundamentally important that I will attempt to represent the old guys in this imaginary conversation.
I was a founder/CEO during the period when cash seemed more like a serf than a king in 1999 and 2000. It was the era of “go big or go home.” Investors loved anything Internet and could care less about profits. I grew my company and I grew it fast. In less than nine months after founding, I booked a $27 million quarter. I was going big and definitely not going home.
Then the dot-com crash happened and investors changed their collective minds. Investors hated anything Internet and wouldn’t fund anything that couldn’t fund itself.
After two years of struggle, three layoffs and very little sleep, we got the company in a position to potentially generate cash. But at that point, doing so was still an open question. We had tough competitors and lots of work to do and still had plenty of time before becoming insolvent. Still, when Marc Andreessen, my co-founder and chairman of the board, said we should start generating cash, something told me that he was right.
When I sat down with my team and told them that we would generate positive cash flow no later than Q2 of 2003 and I planned to commit that to Wall Street, one of the best people on my team questioned the direction. He pointed to our low cash burn, money in the bank and long list of urgent features to be completed. He asked, “Why draw a line in the sand if we don’t have to?” Sometimes it takes a tough question like that to gather one’s thoughts. My response then is my response now to entrepreneurs who ask me this question:
“We should first decide how much we like laying people off, because if we love it then lets stay cash flow negative, because when we don’t generate cash, the capital markets decide when we have to lay people off. In fact, we will have to listen very carefully to investors on everything because as soon as they stop liking us, we will start dying. I don’t know about you, but I do not want to live my life that way. I do not want to have to tell all of our employees that we will do what we think is right until investors tell us we have to do otherwise. I want to control my destiny.”
The manager didn’t even have to reply, because his eyes told me that he knew what I was talking about. This wasn’t about strategy or tactics; this was about freedom. The freedom to build the company the way we thought was best.
Over the next five years, investors wanted us to do lots of things. Some things they wanted were smart, and some very stupid. We listened to what they had to say, but we always did what we thought was right and we never worried about the consequences. Investors did not control our destiny. Over those five years the company’s value grew 40-fold as a result of controlling our own destiny and being able to make our own decisions.
There are many examples of companies that finance their way through massive profitless growth. In the right circumstances and with the right company, this can be a good strategy. For companies like Twitter, it’s a good strategy for two reasons. First, they’re building something massively important with every rational expectation that it is spring-loaded to generate huge amounts of cash in the future. Second, the capital markets over the last six years have been willing to support them (as compared to the capital markets between 2000 and 2006 which wouldn’t have). So, if you are just like Twitter and if you are in this era, everything works beautifully.
However, if you are not Twitter or if times change, then be careful. Until you generate cash, you must heed investors, even when they are wrong. If investors wake up one day and think you are toast, you are indeed toast. When you generate cash, you can respond to silly requests from the capital markets the way Kanye would:
“Excuse me, is you saying something?
Uh uh, you can’t tell me nothing.”
Ben Horowitz is co-founder and partner of Andreessen Horowitz. He was co-founder and CEO of Opsware (formerly Loudcloud), which was acquired by HP, and ran several product divisions at Netscape. He serves on the board of companies such as Capriza, Foursquare, Jawbone, Lytro, Magnet, NationBuilder, Okta, Rap Genius, SnapLogic, and Tidemark. Follow him on his blog and on Twitter @bhorowitz.