Cash Management
What is cash? Cash is liquidity, money you can put your hands on at the moment you need it. In theory you want to keep only the money you absolutely need on hand in cash so that the rest of your money can be more productively employed in some form of compounding investment. I have said before and will say again that compounding is one of the greatest powers of the world because just by waiting, you create value. The longer you wait, the more value you create. Naturally that assumes you haven’t squandered your money in lousy investments.
I am seeing some very strange things around me as the company I run is maturing. It is still unclear if its technology initiatives will or won’t succeed and prevail. Those are actually two different things. By succeed, I mean that we are able to get to the technological place that we believe we can get to for commercialization of the technology. By prevail, I mean that we have properly assessed the competitive advantages of our technology vis-à-vis the alternative technologies available to the market. There are a number of dimensions to competitive advantage that can range between operating efficiency, capital cost, maintenance cost, ongoing durability, and even such mundane things as footprint (size sooner or later does always seem to matter for better or for worse). Of course to keep a proper eye on competitive advantage requires one to not just know the current state of the competition, but where the competition is likely to be going over the time period under consideration. No one is ever static. And there is always the possibility of some great new breakthrough technology that was heretofore unanticipated that can burst onto the scene. All of this is challenging to assess, but it is what every business in the world must consider at any moment in time.
Naturally, making technological progress, especially in a company designed to be just a scientific research and development company, is quite costly and requires an abundance of free cash flow to facilitate. If you aren’t selling anything and bringing money in the door yet, you need to husband your resources very carefully to give yourself the longest running time possible to get to the finish line where revenues can come. Aye, there’s the rub! Estimating the pace of scientific discovery, testing and refining is no child’s game. It is hard enough for a colleague of mine with many scars to show for prior research miscalculations to say, “the discovery business is a bitch”. Every month extra something takes is another month’s worth of burn. And of course, logically, the pace at which you burn determines the pace at which you achieve results. Trying to find the balancing point of how much to productively spend to make progress is especially hard and constantly contentious. Scientists and businesspeople have been going at this for centuries I imagine. Add to that the amount of time and money you should spend to find more money and you have a nice complex array of cash flow variables.
We are now in a place where we have spent more and gotten less progress than we are happy with. So, we are spending less and demanding more from our team. You can imagine the stress that creates. There are endless fingers pointing in endless directions. And here’s the thing, it isn’t clear who was right and who is right now. I can make my own conclusions, but this is prone to lots of subjectivity that can be debated ad nauseam.
What strikes me as particularly interesting is watching a consortium of investors grappling with the issues that underlie this dynamic. What was optimism and enthusiasm that bordered on greed has now turned into caution and disappointment that has created what is best known as investor fatigue. The dynamic that this sets up is very challenging because for none of these investors is this a do or die situation. It is a big enough amount for each that it is non-trivial, but life would go on for them all were this investment to crash and burn. But no one wants to be stupid and give up too soon. To stop right before the finish line is a painful experience…almost as painful as getting bled for too long and feeling you have chased bad money with good. In many ways this is the ever-present dilemma of venture capital.
I view my job as one of trying to be the honest broker that both tells the risk tale while keeping the full and truthful opportunity set in focus. The risks need little highlight at this stage since the investors have all had to reach into their pockets more often than that with which they are comfortable. Life never seems to give us the luxury of clear-cut decisions. If the opportunities are vague or fading, the decision to stop is easy. But when the opportunities suddenly come roaring to the fore and present themselves more vibrantly than ever, there is painful conflict in the decision process. That is where we find ourselves. That is perhaps where we almost always find ourselves in venture.
The world has turned its attention in the most spectacular way towards our technology. I’m talking about global, noteworthy, reliable and serious attention. The rationale for that is not trivial, it is actually existential since it involves the urgency of solving climate change impact. Everyone and his brother is focused on the space and wants a piece of the future pie. We can say that it is for the good of mankind, but I would rather just say it is the typical opportunistic activity of the investor mind. Our investment bankers that were somewhat dubious even several months ago are now very excited about the prospects based on initial conversations with industrial investors/partners/buyers. Just as we are scraping the barrel of our collective honey pot we are being told that we cannot stop now and that there is a pot of gold just over the hill. I have climbed lots of hills and searched for lots of pots of gold over the past fifty years and this one feels as real as any, but that does not ignore the reality that you can only prospect if you have some food in your belly. Getting that food from a crowd of fatigued investors is not a fun sport.
I have nothing but respect for my investors and their money. That respect stems from a belief that risk-takers make the world go around and that risking deserves to be honored for its faith in the process and with as much prudence as can be delivered. I have fought with many investors and disagreed with them in this and many other investment situations, but I am never unwilling to submit to the final will of investors for one simple reason: it is their money. I serve at their pleasure and to do their bidding at the end of the day. I have listened to all the imaginable tales of woe and illiquidity, which are all part of the multi-investor kabuki of venture, but when the dust settles I resort to the only question that matters after all has been said and done: what do you want me to do now?
