By David Spreng
Excess cash as an edge
We all realize that companies that have strong management, solid business models, and excess cash tend to fare much better. No real revelations here, as we can see from this decade-old article in the Journal of Finance that says the “competitive ‘effect’ of cash turns out to be magnified when rivals face tighter financing constraints.”
It’s a commonly held belief that having larger cash holdings (relative to a rival’s) can be an indicator of overall market performance. When aligned with the idea that market-share gains often come at the expense of direct competitors, which in turn may face tighter financing constraints, cash in the bank turns into an easily understood strategic differentiator.
What’s important here is that more cash on a company’s balance sheet is an especially meaningful competitive advantage when capital markets tighten up or the economy trends downward. Companies in such “overcapitalized” positions can fare better during the ups and downs of market cycles. Plenty of cash on the balance sheet can enable them to continue to invest in new technologies, R&D, sales and marketing, and even to consider acquisitions of attractively priced assets elsewhere.
End of good times
Let’s assume we are in a late-stage economic, equity and credit cycle. It is still and especially wise for companies to heed the advice in the “RIP: Good Times” presentation created by Sequoia Capital in late 2008, which counseled companies to raise as much funding as soon as possible but also to “batten down the hatches” ahead of a rough ride.
Per Sequoia, up-and-down markets are inevitable. But there’s history to guide us during these moments. Even if they don’t repeat themselves exactly, you can still prepare for the down times and periods of prolonged economic recovery.
If you don’t have a product, you better get on that. Establish a revenue model that aligns with where the market is expected to grow (if you need to pivot, do it). Covet good customers who pay; shun those who aren’t good customers. Be as visible as possible within your vertical industry. Cut spending, and then find profitability and bolster your balance sheet. Do all this very quickly and spend every dollar as though it’s your last.
Another 2008-style financial crisis is not likely, but prudent advice remains prudent. To use Warren Buffett’s colorful metaphor, when the proverbial tide goes out, we’ll find out which companies have been “swimming naked.”
David Spreng is founder, CEO and CIO of Runway Growth Capital, which provides loans of $10 million to $50 million to fast-growing companies in the U.S. and Canada. As a venture capitalist, he was active in the formation and development of about 50 technology companies with 18 IPOs.