[HN Gopher] Games People Play with Cash Flow (2020)
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Games People Play with Cash Flow (2020)
Author : simonebrunozzi
Score : 205 points
Date : 2024-08-16 07:03 UTC (2 days ago)
(HTM) web link (commoncog.com)
(TXT) w3m dump (commoncog.com)
| bruce511 wrote:
| >> If you start from a wrong set of axioms, you would eventually
| end up with a flawed conclusion.
|
| While cash flow comes into it, I think the primary axiom which is
| different (between VC and bootstrap) is the definition of
| success.
|
| A bootstrap company is successful if it makes a profit, and
| remains in business. Some growth is nice, but there are plenty of
| one-man / familiy businesses to show that growth is not required.
|
| By contrast a successful VC business goes out of business early,
| or with (these days) a multi-billion $ exit. Like a company that
| exits with a $50 million OVER investment is a failure.
|
| If you want to win huge or nothing, then VC is the path to that.
| As a founder if you want to retire with money in the bank, then
| VC is "probably" not the right choice.
|
| Of course the optimum might be a mix- take VC money till you're
| 30, if it doesn't work out you still have time to build a nest-
| egg the old fashioned way.
| EGreg wrote:
| I never understood, what is to prevent a startup from raising a
| VC seed round, then a series A round, and then simply grow at
| its own pace?
|
| Is there something in the SAFE note or whatever, that says the
| startup MUST fail fast, go big or go home? It can grow
| methodically, can't it?
|
| The closest explanation I've ever heard is that VCs do
| "signaling" in future rounds... but listen, if you have a few
| extra million dollars to grow your startup, and you still can't
| become profitable after that, then something's wrong with yoru
| business acumen, in my opinion. Anyone with a few million
| dollars is able to hire people and create a profitable product.
| What happens if a company pivots to being profitable "too
| early", what can the VCs do?
| zhoujianfu wrote:
| That is the ideal strategy, but easier said than done. Once
| you've got that cash it's very very hard to act like you
| don't have it... especially when everybody knows you do.
| cshimmin wrote:
| Huh, I've always assumed it has to do with some about of "de
| jure" control over the board that the VC assumes when the
| capital is raised. If they don't like the founders growth
| strategy , can't they just throw them out? Or is that not how
| it works?
| fleischhauf wrote:
| I guess it mus be something like this, I don't think
| someone would invest a rather large sum without having
| something like this in place
| bruce511 wrote:
| Owning a company is different to owning say a bicycle. When
| you go buy a bike, you go into a store, get the bike, leave
| behind some cash, and you're done. Not a lawyer in sight.
|
| A company is a different animal. Lawyers, bankers,
| suppliers, partners, accounts and so on. Lots of paper gets
| signed by founders and investors regarding ownership,
| liabilities ("for all debts current and future") and so on.
| When VC capital comes into the mix things get a LOT more
| complicated.
|
| you can't just "give the company to the employees" because,
| frankly, that would be _really_ bad for the employees (what
| liabilities are you taking on?) It 'd also be _really_ bad
| for current founders and investors. (There 's likely paper
| floating around linking you to the company, and that
| doesn't go away just 'cause you lost interest etc.)
|
| At some point it's all just too complicated and too scary
| for the old owners and the new owners etc. Basically the
| risk (to all) just exceeds the potential value of what is
| there.
|
| Then there's agreements with banks, suppliers and so on,
| which can on occasion be "non-transferable" so it's not
| even just as simple as creating a new structure and moving
| all the IP into that.
|
| I'm speaking generally here - your mileage will be vary a
| lot depending on the exact circumstances.
| rented_mule wrote:
| During the dot com boom / crash, I worked at a profitable, VC
| funded startup. I don't know the legal / financial mechanism
| by which they did it, but our VCs shut us down six months
| after the crash. They wanted to put all of their attention
| into the other company in the portfolio that survived the
| crash, Yahoo, because their revenue was already far higher
| than ours could ever be.
|
| We were profitable (100s of K per year on revenue of a few
| million a year - small potatoes). Those numbers were growing
| steadily, even after the crash, but they weren't going to
| explode. We were given 30 minutes to collect our things and
| leave the building, but I suspect our founders knew a day or
| two earlier. They made a lunch reservation for all the
| employees that same day so we could say goodbye to each
| other, but we had to pay for it ourselves. It was a very
| strange experience.
| langcss wrote:
| That makes no sense to me. They could give the company to
| the employees instead right? Unless they wanted the code or
| something.
| nine_k wrote:
| If the company was seen as a competitors to Yahoo, it
| looked reasonable to shut it down. The VCs invested in
| several companies that had a promising direction, then
| shut down all but one that was growing fastest and grew
| biggest.
| rented_mule wrote:
| We weren't in competition with Yahoo in the marketplace.
| But we were competing for the VCs' focus, and that's
| still competition.
| EGreg wrote:
| But I dont see how they can force the founders to shut
| down the company
|
| They maybe gave them a big carrot u didnt know about
| rented_mule wrote:
| I am close friends with one of the founders. That
| friendship predates the company by several years. He did
| get a payout - I was with him when he pulled it out of
| his mailbox. A check for 32C/ for all the stock he had.
|
| I don't know the details, but I believe they did it via a
| redemption rights clause in the investment agreement.
| https://venturecapitalcareers.com/blog/redemption-rights
| actionfromafar wrote:
| Strangely, transferring a company can be more complicated
| if you care about liabilities, contracts, assets, non-
| tangible and otherwise.
|
| That flavour of VCs don't have time nor care. Maybe they
| had several more companies to close that day.
| rented_mule wrote:
| They sold off the assets... the most valuable asset was
| our data. I don't know what they were paid for the data,
| but I'd guess a couple of million dollars given what I
| know they spent to migrate it to the buyer.
| refurb wrote:
| Unless the founders own 100% of the company (which they
| don't if they raised money), no, they can't give it to
| employees.
| langcss wrote:
| To be clear I mean the investors! However it sounds from
| another comment like the investor instead got some money
| from it they didn't just drop it like a ball.
| specialist wrote:
| Your experience reminds me of how Google just cancels
| products, instead of figuring out some way to spin them
| out. Like maybe pass a product over to Google Ventures. Or
| set up an incubator.
|
| eg I'm certain that Google Inbox could have been a decent
| modest company on its own.
|
| I learned from reading u/patio11 that there's a market for
| buying and selling small businesses. Is it weird that
| nothing like that has popped up for VCs/investors who want
| to divest from their non-unicorn companies?
| bluGill wrote:
| Google can sell projects after or while shutting them
| down. Make them a large enough offer, and they might
| bite.
| fragmede wrote:
| Given that Wistia, MailChimp, Patagonia, and GitHub, among
| others did the seed/series A, profitability thing you
| suggest, there are other mechanics at play here.
| Specifically, as the article raises, profitability as in net
| revenue isn't everything.
|
| edit: swapped Basecamp for Wistia, because Basecamp did not
| take VC money.
| EGreg wrote:
| Basecamp took no VC money
|
| (Except for Bezos Expeditions many years into it)
| fragmede wrote:
| you're right! edited.
| mewpmewp2 wrote:
| It depends on the product. The longer you have to push for
| the profit the hogher the reward sonce everything easy is
| already done. Things that are left to do have higher and
| hogher barrier of entry and depending on the business it will
| take a lot more time and up front capital to have a chance at
| profitability.
| ftlio wrote:
| VCs with board seats vs you are trying to run your company
| with all its intricacies while VCs are often managing you as
| yet-another-in-some-tranche.
| jasode wrote:
| _> I never understood, what is to prevent a startup from
| raising a VC seed round, then a series A round, and then
| simply grow at its own pace? Is there something in the SAFE
| note or whatever, _
|
| You're looking for something in legal paperwork with Terms &
| Covenants that for some reason is unstated in public
| discussions.
|
| The real underlying reason your idea of _" just take the VCs
| money and do the opposite of what the investors want"_ isn't
| common is that it goes against the founders' _personal
| integrity_ of doing business honestly. This means the
| founders not lying to VCs when they make presentations with
| the reasons for raising capital. I.e. the founders forecast
| TAM Total Addressable Market for revenue, forecast costs for
| servers and employees, explain their ambitions for growth,
| etc. The type of founders trying to get in front of VCs to
| convince them to fund their startup are _supposed to be a
| self-selected set entrepreneurs who inherently want to grow
| fast and don 't need VCs telling them to do so_. If honest
| business dealing is the premise, then there's no need to
| "trick" the VCs into wiring them millions into the startup's
| bank account and then tell them _" oops, I lied in my
| presentations and now that I have your money, I just want to
| grow slow at my own pace."_
|
| Your question can also be modified to ask about a VC fund's
| intentions: _" Why can't a VC fund raise money from LP
| (Limited Partners) and then just live off the guaranteed 2%
| management fee instead of taking risky investments and
| possibly losing money?"_ -- What stops VCs from doing that is
| the venture capitalist's personal integrity when asking the
| LP for money.
|
| With that said, there can be a difference in legal mechanisms
| between an angel/seed round with no board seat taken by a VC
| -vs- Series A with a VC on the board. At later stages, the
| board can outvote the founders and/or fire them.
| lifeisstillgood wrote:
| The flaw is in the step 2. - raising capital reduces skin in the
| game which reduces "incentive". Honestly heard this before in
| things like "don't allow founders to cash out in early rounds
| they won't be hungry". This is akin to "if you take the shackles
| off your slaves they will run away"
|
| Taking on capital reduces risk for the founder which makes it
| more likely they will take better long term decisions. There is a
| balance obviously - if you give me a billion dollars for my
| pitchdeck I will certainly feel reduced risk but that may be
| offset by the risk the owners of the billion now take on.
|
| But yeah, the flaw is thinking hungry people make good long term
| decisions
| fragmede wrote:
| being hungry means people are driven to make decisions, just
| not necessarily good ones. they're after the drive, and
| hopefully acumen, but drive is more important than acumen, they
| hope.
| lifeisstillgood wrote:
| Is that the "VCs have never been hungry, met human beings or
| read any history" theory? :-)
| ftlio wrote:
| Great read, especially from the perspective of just trying to
| understand why people overfit certain thinking to certain
| problems.
|
| My startups perspective: I think it's hard for people to
| understand the subtlety from all the memes and hearsay.
|
| We hear that you need to talk to your users to understand what to
| build, but I've seen this fall flat on its face and lead to
| extreme confusion, several times now, when you're not talking to
| your users as a matter of observing your product/business model
| against reality to then update the axiomatic thinking that
| (hopefully) lead you to its current iteration.
|
| I've seen this play out as a cringy ask to "let us know if you
| think of any other features you might like" met with puckered
| faces from customers that essentially said "or how about not
| because my job isn't to build your product?"
|
| This is Henry Ford / Steve Jobs talking about faster horses.
| You're not asking your customers what to build. You're asking
| them to help you understand the reality against which your logic
| plays.
|
| Then there's the opposite, where a business marches forward
| because some axiomatic thinking has determined that the macro
| environment should support it, not updating itself against a
| pending catastrophe in cash flows that leads to cuts that further
| undermine its ability to exist even within its own framework.
|
| Design and test from first principles, but operate for the pain
| of as many rounds as possible. Maybe one day you can truly
| optimize and it won't hurt as much.
| IneffablePigeon wrote:
| Yes. What you ask is just as important as whether you're
| talking to your customers. The Mom Test is the best book on
| this.
| reducesuffering wrote:
| The Mom Test also talks about getting the problems from the
| customer but owning the solution how it solves the problems
| they have.
| devjab wrote:
| I think you should be asking about their work, and try to
| understand their business processes rather than what they want
| from your software. Then you can spot their pain points and
| develop features for those. I know this is easier when you're
| an internal developer, but the best way we have to spot
| important features (and the removal of some) is to simply spend
| a week in the shoes of an employee using the software.
| Everything which annoys you, annoys your users.
| ragebol wrote:
| But be sure to ask why business processes are the way they
| are.
|
| If you can eliminate a process all together, I'd be a happy
| customer.
| jiggawatts wrote:
| > cringy ask to "let us know if you think of any other features
| you might like"
|
| One of the worst examples I've seen is trillion-dollar
| corporations like Microsoft basically putting new features to
| the popular vote.
|
| You can buy from them a cloud service to the tune of a million
| dollars a month, but if you notice a bug, they tell you to go
| try and drum up votes from other users on some public forum.
|
| It's insane, to the point where you can point out that their
| own product A doesn't work with their own product B where
| literally the only purpose of A and B is to be used in
| combination and they'll go tell you to upvote a "suggestion" to
| fix it.
|
| The hilarity of this is that votes (or customer opinions) are
| hugely biased when sampled like this. If a new product isn't
| out of beta yet, it has very few users to vote on its features.
| If a some subset of a product _just doesn 't work_, then users
| ignore it and then it effectively zero users, so zero votes on
| its issues.
|
| _Potential users cast no votes_.
| sweeter wrote:
| Microsoft has some really perverse incentive structures. Side
| note, their forums are insane. Most of the "help" is "just
| run sfc /scannow and then re-install windows" they very
| clearly do not care to fix actual problems or to help people.
| They approach problems from a very far distance using a one-
| sized fits all approach. I think this says a LOT about how ms
| operates. I do like how Unix is the polar opposite of this.
| Its very DIY and fix it yourself.
| TacticalCoder wrote:
| > This is Henry Ford / Steve Jobs talking about faster horses.
| You're not asking your customers what to build. You're asking
| them to help you understand the reality against which your
| logic plays.
|
| There's also this joke that the absolute scariest thing ever is
| an user with an idea. As in:
|
| _" I need to go from A to B"_, so far so good, that's what we
| need to know an act on. Then the user has an idea: _" What if
| midway I could change to a fresh horse?"_.
|
| I mean, sure, yup, it's been done (changing horse midway to
| quickly deliver a letter)... But that's not how cars were
| invented.
| graemep wrote:
| There are a few very strange, almost unbelievable, things said
| about people's understanding of the issues.
|
| I can understand that startups and small business may not
| understand that value comes from cash flow not profits. The value
| of an asset is the value of the discounted cash flow. This is
| very basic to the theory finance, so how come banks and wall
| street did not know it? There has to be more to this.
|
| just being an institutional investor looking at selling at a
| profit as soon as possible.
|
| The stuff about payment terms, speed and pre-payments is standard
| good cash flow management. Did these people have no professional
| advisors explain this?
|
| This is literally business textbook stuff. I have the textbooks
| (even the MBA ones, which are a bit more basic cover it all in
| the first few chapters).
|
| The British supermarket chain Kwik Save financed its growth (in
| the 1970s) by getting long payment terms and selling for cash,
| and they were imitating the strategy of similar businesses in the
| US. This is not new.
|
| I read the Bezos quote as primarily talking about long term vs
| short term, not cash flow vs profit measures. I am sure he
| understands both issues given his background in banking and
| investment, but here he is really talking about looking at the
| long term. It makes sense given he owned a large chunk of the
| business he intended to hold, rather than being focused on next
| year's find manager league tables.
| refurb wrote:
| _I can understand that startups and small business may not
| understand that value comes from cash flow not profits._
|
| This is not correct.
|
| You can have positive cash flow over a period but still be
| losing money.
|
| You can also have minimal cash flow but be wildly positive.
|
| Cash flow is one component of value, but not the only one.
| roenxi wrote:
| In this case the argument is flawed because it is too loose in
| defining a bunch of words and premises. Eg, you can't argue about
| "bad decisions" because in this case it is a meaningless term.
| With the frame in the argument it likely isn't correct to say
| that "once you have less skin in the game, it is easier to make
| bad decisions". You are still empowered to make the best
| decisions you can, having less skin in the game doesn't change
| that.
|
| The skin-in-game principle is a pithy way of talking about
| principle-agent risks. That is to say, it is a problem for the
| people fronting the money, not the people on the receiving end.
| The people on the receiving end are strictly better off (ignoring
| that they're going to have to trade away control to get the
| money, obviously - they have strictly more options in the short
| term). And the people giving the money will still invest despite
| that, because they need to take risks to earn money - their
| strategy is to take risks to earn a premium, so they're looking
| for sensible risks to take.
| totetsu wrote:
| This was posted 4 years ago also.
| https://news.ycombinator.com/item?id=25357669
| brador wrote:
| The flaw is unwritten step 0: The goal is to make money not run a
| startup.
|
| A startup is a means to an end.
|
| Borrowed money gets you there faster with less risk to self.
| rwmj wrote:
| This is true from my very limited start up experience. Our start
| up was also self-funded. There were times when there was work
| left on the table, because we couldn't afford to hire an extra
| person to do the work, because we didn't have the cashflow to pay
| them for the first few months while they came up to speed.
| wodenokoto wrote:
| I had a an accounting class in college and cash flow never
| clicked.
|
| I get the examples, especially the restaurant one.
|
| But I don't blame anyone for not being able to play cash flow
| games.
| nick3443 wrote:
| Simply put, assuming the books will balance eventually, would
| you rather hold the money or hold the IOU, and for how long? If
| you hold the money as it changes hand, you can make money off
| of that (or use it for opening the next store).
|
| For a corporation where revenues are consistent, 90 days of
| payables that you haven't paid anybody yet could be equivalent
| to tens or hundreds of millions of interest-free loans.
|
| Home depot notoriously has payment terms that can extend beyond
| one year.
|
| Edit: To add on to that, understanding the accounting of
| E,I,T,D, & A (earnings, interest, taxes, depreciation,
| amortization) as in EBITDA is an important factor to grokking
| beyond the surface of the article. Basically cash accounting
| versus amortization accounting.
| SoftTalker wrote:
| > 90 days of payables that you haven't paid anybody yet could
| be equivalent to tens or hundreds of millions of interest-
| free loans
|
| ... for the first 90 days, it seems to me. Then you're back
| to paying them, they're only time shifted. So it strikes me
| as a way to take a 90 day loan, once. What am I missing?
| catherd wrote:
| It's a forever loan for whatever your average payables
| total to over 90 days (so $10k every month would be a $30k
| loan). The loan lasts forever or until you close out that
| line of credit/wind up the company.
| nick3443 wrote:
| The loan lasts as long as your payables continue to
| average above $10k/month (or 30k in every rolling 3mo
| period). Businesses get into trouble when they have a
| short term disruption and suddenly their cash flow is
| impacted, then they have no more receivables and have to
| quickly come up with money to close out the payables. If
| they are already over leveraged or don't have
| creditworthiness then they can become insolvent.
| bluGill wrote:
| Take out a 90 day loan for 10k and invest in something, the
| 30 days latter take out another, the 30 dayn latter pay off
| the first with results of the first investment while taking
| out another loan. You never make money but you pay all the
| bills along the way and slowly build up some hard assets
| that are paid for.
| golol wrote:
| So as I understand you play these games with cash flow but
| ultimately the objective eventually is to still turn that into
| profit. After you've grown your company for several decades at
| aome point you stop growing and you start milking it. Similarly
| you want to accumulate float as a restaurant to prepay your
| suppliers to get better prices and hence more profit.
| spydum wrote:
| Actually,I don't think you ever need to be profitable, as long
| as you are cash flow positive, there isn't really a reason to
| stop the merry-go-round. It sounds weird, but if every month
| you collect more cash, and you pile it into future
| investments/raw materials, it just turns into more cash flow
| later.
| yuliyp wrote:
| Huh? The ways to be cash flow positive but unprofitable are
| borrowing/investors putting money in, depreciation
| adjustments, or growing accounts payable. All of which
| eventually stop.
| jdmoreira wrote:
| Not necessarily. You can just sell it and get paid. Either
| selling it in the public markets or private to a PE firm or
| someone else
| bjornsing wrote:
| Every time I read one of these "thinking doesn't work" blog posts
| I come away thinking "omg, these people just have no idea how
| hard it is to think". IMHO the only situation you should be
| allowed to draw axioms and propositions like little balls with
| arrows between them is if you're working in a formal theorem
| proving system. Anybody who has tried that knows that it's just
| not true that the conclusion "startups shouldn't raise money"
| logically follows from vague statements like "you'll be more
| focused if you don't have much money".
| aeternum wrote:
| Yes, throwing out first principles thinking just because you
| failed to think about all the first principles is a major
| error.
|
| You can often discover missing first principles by going the
| other direction. IE what companies were successful largely
| because they took VC money?
|
| If one competitor is taking VC money and another is not, which
| is more likely to win the market?
|
| This article seems to make the common error of destroying a
| fence before fully understanding why that fence was built.
| notpushkin wrote:
| The _Startups shouldn 't raise money_ link is dead. Here's the
| archived version:
| https://web.archive.org/web/20230102110907/https://ensorial....
| azeirah wrote:
| From my perspective it is neither wrong nor right. Articles are
| supposed to be written for a target audience, and I think the
| only issue is that the original article didn't mention the target
| audience is people who don't want to aim for the moon, but would
| be satisfied with just having a stable life where they're in
| control of their own decisions; in the vein of an indie hacker, a
| family business or other sustainable ways of doing small to
| medium business.
|
| This is hackernews, and we, as an audience live in a little
| bubble where the only right way to do business is by disrupting a
| market and becoming the next Google, Microsoft or Apple. Just
| like some of the contemporaries that originated from this
| subculture here like; Stripe, Reddit and openAI.
|
| There are many ways of doing business. The original article had a
| sound strategy for one particular way of business. This article
| by common cog has another sound strategy for doing business.
|
| Different target audiences, different games.
| whall6 wrote:
| One of the most genius "games" that I've seen in real life is
| Tesla's offering of a roadster for a huge up front payment to
| pre-order (~$45,000).
|
| They literally created a new product out of thin air that they
| are untethered to in terms of time or specs (except that it has
| to be able to accelerate with the force of a jet engine?) to
| "unlock" millions of dollars of cash flow to fund current
| operations. (I imagine this to be the brainchild of Zach
| Kirkhorn.)
|
| I don't know how many startups can employ "pre-order" tactics
| with their lack of brand power, but the basic essence is probably
| useful.
| dfhvneoieno wrote:
| That's not "genius".
|
| Saying "give me money now for something later", making it vague
| and then not delivering isn't new or genius. It's something
| which is illegal, and this will be found to be illegal, once
| there's political will to investigate/prosecute.
| hobs wrote:
| Yep, that's called Fraud. The only reason its continuing is
| because the political will to prosecute the rich, especially
| their big donor friend Elon who they've been giving billions
| of government subsidies to - investigating him after helping
| him makes them look bad too, and oh boy did MANY state and
| federal dollars flow his way.
| ethbr1 wrote:
| It's fraud if you _never_ deliver.
|
| It's certainly not fraud if you are making progress towards
| delivering at some nebulous future date, and there was no
| contractual delivery date in the pre-sale.
|
| It's debatable whether it's fraud if the initial pre-sale
| expressedly included the possibility of non-delivery (i.e.
| Kickstarter).
| hobs wrote:
| > It's certainly not fraud if you are making progress
| towards delivering at some nebulous future date, and
| there was no contractual delivery date in the pre-sale.
|
| Only legally, this is basically just fraud with legal
| disclaimers covering your ass, there's no integrity here
| and no intention of delivering anything more than the
| hyperloop.
| ethbr1 wrote:
| Legal terms are the codification of a contract between
| buyer and seller.
|
| _Caveat emptor_ exists because ultimately it 's the
| buyer's decision whether or not to take an offered deal.
|
| If some people were dumb enough to agree to a
| disadvantageous contract with Tesla... well, world's full
| of fools.
| fakedang wrote:
| It's not illegal. It's product validation.
|
| It would have been a fraud had Musk taken the money and
| disappeared into the Caribbean sunset. Which he did not.
| anymouse123456 wrote:
| Friendly note to folks building unusual businesses.
|
| Much of the received wisdom of Silicon Valley startup culture is
| centered on developing new markets that do not currently exist.
| This activity has a very specific set of risks and rewards and
| for that profile, the advice is generally sound.
|
| If your business is attacking an existing market with entrenched
| players, more than half the advice is wrong.
|
| Cedric does a great job navigating these differences IMO.
| arthurofbabylon wrote:
| This strikes me as an excessively complex argument. Personally, I
| would zoom way out to work with some more abstract axioms,
| namely...
|
| - Money now is more valuable than the same money later.
|
| - The above applies for all parties to varying degrees.
|
| - Some operations are money-constrained.
|
| - There are ways to move money forwards or backwards in time.
|
| Now most businesses are not in a position to financially engineer
| all that much, rendering the response to a given situation per
| the above axioms rather simple.
|
| However I agree with the piece in its insistence that you
| shouldn't just look to the obvious categorical solutions -- there
| may be some interesting opportunities to find in the cracks. This
| point was well outlined in the example of the restaurant owner
| securing a discount by pre-paying for ingredients.
|
| I would love to hear some non-monetary examples of axiomatic
| reasoning failures. Whenever I reflect back on a process I led a
| couple of years prior, I am startled by my limited awareness of
| dynamics/risks/opportunities -- even though I was confident at
| the time and it went well. These reflections make it clear to me
| that we are always missing useful information, and I further laud
| the author for acknowledging this fact.
| ethbr1 wrote:
| The best axiomatic reasoning failures I've seen are in Thomas
| Aquinas' _Summa contra Gentiles_ , e.g. 13th century natural
| law Christian apologism.
|
| Don't get me wrong -- they are works of philosophical art and
| among my favorite texts in all of philosophy.
|
| But they also very much abuse the space between axioms to
| deduce truth which seems absolute but is incomplete.
| scott_w wrote:
| The axioms you state must be backed empirically by observing
| things that happen in the real world. The article explains the
| real world activities that back those axioms.
| RachelF wrote:
| The important axiom you forgot:
|
| - The government needs to take your money via tax on profits.
|
| Result: Via fancy accounting, businesses can pretend not to
| have profits and avoid tax.
| bluGill wrote:
| That isn't the axiom. The axiom is governments need money.
| They have many different options to get it and often there
| are ways to give it less of yours.
| HipstaJules wrote:
| Love the article!
| wwarner wrote:
| Great read. I knew as soon as I saw EBITDA that Amazon would be
| used as an example, but the savings for prepaying for beef blew
| me away.
| bluGill wrote:
| That is why just in time generally works so well, it reduces
| costs all down the line. you don't even need to pay in advence,
| just order in advance with no cancleation clause.
| scott_w wrote:
| This was a great read and definitely fits into something that
| regularly crosses my mind: "what you say is incorrect but it will
| take a lot of time and energy to explain why." The length of this
| article definitely proves this point!
|
| Just to nitpick (and not detract from the article) this point:
|
| > Once you have less skin in the game, it is easier to make bad
| decisions. The author argues this is due to a) having a capital
| buffer to cushion you, and b) having more time to waste.
|
| I actually don't think this holds true. It's possible to make bad
| decisions BECAUSE you have skin in the game. Would you take a 60%
| bet if the downside was losing your home? Would you do it if the
| cost was someone else's home, that person owned an entire city
| and they'd given you that home for the express purpose of placing
| those bets?
|
| I saw something like this when the founders at my work promoted
| someone else to be CEO and, a little while after, took cash out
| the business (legally) with the express purpose of derisking
| themselves. They recognised that they weren't able to take the
| necessary risks to push the business forward, so appointed a CEO
| with less skin in the game and reduced their own exposure.
|
| It paid off.
| dudeinjapan wrote:
| Great article, shared with my team. Nick Kokonas mentioned is
| also the founder of the booking app Tock.
| imheretolearn wrote:
| > Once you have less skin in the game, it is easier to make bad
| decisions.
|
| I beg to differ. I think _this_ article is incorrect because it
| assumes that above is true. The money that you raised from
| venture capital is literally oxygen for your company. It is
| _your_ lifeline as much as it is the VC's skin.
| sweeter wrote:
| these are the _exact_ same arguments people make against
| something like UBI or really any public benefits. "starving
| people feel motivated to eat food, so they work to make money to
| buy food. therefore starving people is the correct thing to do
| because _I believe_ that if we give people food they will be lazy
| "
|
| I have personally seen a handful of people in tech and tech
| influencers argue that if people had all their basic necessities
| met, then they wouldn't be motivated to do anything and they
| would just play video games all day.
|
| To me, this is a profoundly privileged opinion to have that
| follows this _exact_ same hyper-idealistic thinking pattern. It
| comes from these "first principles" that are naive at best. In
| reality it is more so the bias of the person showing through, we
| can analyze these systems, look at the data and we won't be
| coming to these conclusions.
|
| These "first principles" are not based on data or understanding.
| They are based on emotions, personal experience and biases. ie "I
| was lazy as college student, therefore all people are lazy..
| therefore if people had their needs met, they would also be lazy
| like I was... therefore depriving people of basic necessities is
| actually the justified thing to do" I say from my multi-million
| dollar house in North Dakota with my 300k a year salary and cushy
| full-time youtube platform.
| jollofricepeas wrote:
| In the case of homelessness...
|
| We've learned both that if you ...
|
| 1) provide free housing people will use it
|
| 2) fine/jail people for camping on the street and in parks it
| works as a deterrent
|
| Why not both?
|
| I feel lazy right now but feel free to find your own sources
| for the points above. The jailing one is from a study done in
| the Nordic states...last I remember.
| bluocms wrote:
| > Once you have less skin in the game, it is easier to make bad
| decisions. The author argues this is due to a) having a capital
| buffer to cushion you, and b) having more time to waste.
|
| It's not wrong per se but worded to hide the benefit. Having less
| skin makes it easier to take higher risk. Which means more "bad"
| decisions but also with higher potential.
|
| -------
|
| While the prepayment strategy described here is interesting, I'm
| skeptical about some of the claims and implications. Here's why:
|
| > So how much should they discount it? So let's say we're going
| to buy steaks. We're going to pay $34 a pound wholesale for dry
| aged rib-eye, we get net-120 (normally). So I call the guy and
| say "I'm going to use 400 pounds of your beef a week for the next
| 4 months, for our menu, which is about about $300,000 of beef,
| what (would) we get, if we prepay you?" And he was like "what do
| you mean?" I'm like "I want to write you a cheque tomorrow for
| all of it, for four months." And he was like, "Well, no one has
| ever said that." So he called me the next day, he said "$18 a
| pound" ... so ... half. Half price.
|
| 1. The 50% discount seems implausibly high. Even considering the
| benefits of prepayment and volume commitment, typical early
| payment discounts in most industries range from 1-5%, rarely
| exceeding 10%.
|
| 2. The story implies this strategy reduces waste, but the
| restaurant's beef consumption remains unchanged. The butcher
| isn't selling more beef overall, just securing a guaranteed sale
| for a portion of their product.
|
| 3. While prepayment does reduce risk for the supplier and improve
| their cash flow (which justifies some discount), it doesn't
| fundamentally alter the supply-demand dynamics or the perishable
| nature of the product.
|
| 4. If such extreme discounts were readily available, it suggests
| either highly inflated initial prices or an incredibly
| inefficient market. In reality, these price disparities would
| likely be arbitraged away quickly.
|
| 5. The net-120 terms do carry risks (default risk, cash flow
| pressure, inventory carrying costs), but it's unlikely these
| factors account for such a large portion of the price.
|
| The principle of prepayment providing mutual benefits is sound,
| but the magnitude described here is likely overstated or
| oversimplified. A more realistic scenario might involve a
| combined discount of 20-25% at most, factoring in prepayment,
| volume commitment, and possible seasonal factors.
|
| This story, while engaging, highlights the importance of
| critically evaluating business anecdotes, even from seemingly
| authoritative sources. The restaurant industry certainly has room
| for innovation in supply chain and financial practices, but the
| impacts and benefits may be more nuanced than presented here.
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