Start-ups to hoard cash

I was reading an article on FT yesterday (title as below) and I could totally relate to that.

FT3

I’ve seen how lavish some start-ups can be when it comes to their operating expenditure. Partly to motivate their team, hence they bring them to a “working” retreat or business planning session or team-building activity at 5-star hotels. But really, is it necessary? Do you need a 5-star hotel to motivate your team? If your team is motivated enough, you don’t need to shower them with the fancy place and food. I do agree sometimes you need to take a break from your office to have a clear mind so that you can have a productive brainstorming session, but it doesn’t need to be an expensive place, unless you are cash rich.

If I’m the investor/VC, I would feel disheartened to know about how my money is being utilized. One can argue that if the purpose of the funds raised is not clearly stated in the terms of sheet, then the company is not doing anything illegal. True, but is it ethical? I wouldn’t qualify this type of company as a long-term sustainable one, for sure. To me, it shows that the management of the company is short-sighted and I can’t keep parenting them about their own expenses. I care about the long-term returns you ought to generate.

To some of the start-ups, they think it’s ok to spend the money now for short-term purposes. As long as they can show the growing revenue, to them, it’s ok if they are not generating EBITDA positive yet. Once they run out of cash, they will just use their growing revenue numbers to estimate future growth and project a relatively high valuation and allure other investors/VCs to fund in them.

Well, that’s what they think. As the FT article highlighted, in fact there have been several warnings given by the top economists, asset managers, that we are moving towards the end cycle of the economy and they are worried that “the global economy and stock market volatility may threaten to trickle down into private tech financings”. Hence, companies especially start-ups are recommended to be careful in their spending, hold enough cash to cover at least 12 months of expenditures. I wish some of the management of start-ups are aware about what’s going on with the economy. To be honest they don’t really care, which I can’t blame them as their personalities are different and not in their interest to keep up with the global economic/financial issues. Hence, you need a damn good CFO who doesn’t listen to your CEO and credible board of members to give sound advice.

You can read more about the article here.

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