60 Cash, Financeability, and Control

CASH: FUEL TO GET TO THE NEXT MILESTONE

Cash is more important than your mother.

-Al Shugart

Inadequate cash for growth is the number two killer.¹

• • • • • • • • • • • -John Shoch

                       

Cash is a crucial resource, because only cash can buy the fledgling company time to search for answers to such hard questions as: When will a viable business plan be ready? When will the technology work? When will the product work? What is the market for the product? How long will customers take to decide to buy the first product, and when will they and their colleagues buy more? When will customers pay cash for the product?

In many ways, cash and time are opposite sides of the same coin, since time sometimes "buys cash." With time, a critical problem can be solved so that a product can become operational or go from unacceptable to great. Also, with time, a customer may pay a bill, a large order can come in, or more financing can be obtained. Nearly all failed companies claim that if they had simply had more cash and had not run out of money, the venture would have worked. On the other hand, cash can also prolong the inevitable demise of ill-conceived, cash-rich firms.

Ideally, the company will at all times have more cash on hand than what is called for in the business plan-i.e., the company will be "above plan." Having adequate cash permits the firm to control the timing of its next request for financing, such that the request is made when it is in a strong negotiating position. For example, the cash available during a start-up's product development stage must last through the alpha-testing phase, so that investors will be convinced that the product is sound and will therefore regard the company's next round of investment as worthy of a higher valuation.

In contrast, lack of cash could put the company in the unenviable position of needing money immediately in order to meet its payroll. When the firm is thus pressed to the wall, its negotiating position is nil, and investors and bankers can make the price of money almost anything they want, including below the price of the previous round of financing. Sy Kaufman of Robertson Stephens, when counseling a company about the need to accelerate its funding plans, stated: "The pain caused by running out of money is just unbelievable and unbearable. Don't ever let this happen to you."

A company in the market development stage can find that lack of cash is the primary limitation on its growth and success. Banks are usually unwilling to

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1 Lack of team is the number one killer.