Wednesday, January 23, 2013

Equity vs. Cash = Sprint vs. Marathon

In the hyper glamorized world of high tech entrepreneurship with billion dollar exits and focus on equity growth, it is easy to forget the traditional and age old way of doing a business - maintain positive cash flow and earn profits every year. The current breed of entrepreneurs, especially the educated ones, tend to forget the second type - which leads to missing out on good opportunities.

Fundamentally there are two types of companies: Equity growth focused and cash growth focused. The two require different mindsets and approaches from the founders.

An equity focused company is always running a sprint to grow as fast as possible. Scale up acquisitions, scale up employees, scale up products, scale up offices, scale up investments - because you need to finish the race before your competition catches up, or market dries out, or investors lose interest, or public hype dies out. When the CEO looks at P&L, he looks at growth, and not profitability.

On the other hand, a cash focused company is like running a marathon - focus is on preserving energy (cash) to sustain for a long time. Cash is the real king here. Founders focus on cash generation, working capital management and cash flow statement. They focus on cash salary and dividend income. Most small businesses like restaurants, real estate, shops fall under this category.

Though a company can only have one of the above two DNAs, there are lessons to be shared. If you are an equity focused founder, make sure that you do not lose focus on your cash flow statement. If you are a cash focused founder, make sure that you do not lose focus on growth and re-investment of your cash.

Aspiring entrepreneurs should consider traditional cash businesses and not be completely swayed away by '1 in a million chance' billion $ exit. You can still be rich, enjoy a good lifestyle, generate employment and be truly your own boss.

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