[HN Gopher] Fast Cash vs. Slow Equity
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Fast Cash vs. Slow Equity
Author : jger15
Score : 96 points
Date : 2025-02-21 22:20 UTC (3 days ago)
(HTM) web link (blog.nateliason.com)
(TXT) w3m dump (blog.nateliason.com)
| brudgers wrote:
| An investment strategy focusing on cash flow versus equity growth
| is also an important difference between most people who invest in
| businesses and venture capital.
| anovikov wrote:
| Equity business is thoroughly inaccessible to the vast majority
| of people, especially the IT people. It requires being an insider
| at least to a degree, and it requires apart from knowledge and
| skills, at least some luck.
|
| I've seen a lot of extremely bright, talented and hardworking
| people trying to play that game - all failed, some ruined their
| entire lives simply for refusing to give up for too long. While
| those who went into cash business - as simple as an outsourcing
| shop - are almost all doing fine.
|
| Nudging people to try for "equity business" is a dangerous advice
| to give.
| apex_sloth wrote:
| Could you elaborate on that? How come it requires being an
| insider? What constitutes an insider?
| anovikov wrote:
| Someone who does things not because he read about them on the
| Internet, but because they were invented or co-invented, or
| owned by people he went to school with, or family
| connections. When "system" is not something you fight with,
| but it's YOU and people who are your family or treat you as a
| family. Elizabeth Holmes is a prime example but only because
| she was caught.
| croon wrote:
| It also requires you already have enough money to not need any
| returns for a few years.
| anovikov wrote:
| That is a much smaller problem, most people in IT have it.
| Atreiden wrote:
| Citation needed. From my experience, being able to go two
| years without income is an extreme edge case.
| tasuki wrote:
| That's because most people apparently grow their spending
| in sync with their income. The people who grow their
| income and not their spending are "an extreme edge case".
| startshipbanana wrote:
| I don't understand why people are so opposed to starting a
| bootstrapped consulting company. You can start as a single man
| shop and then hire people and expand.
|
| I'm running a consultancy in a LCOL area. Last year we made
| 400k revenue, 150k profit and 40% growth. We already have
| verbal agreements for around 400k worth of sales for this year.
| We have the employees for 600k revenue and if we manage to
| bring in more sales we can grow the team to meet demand. 600k
| revenue would mean 250k profit for us.
|
| I can easily see us growing the company to a few million
| revenue in the coming years. Making lots of profit while having
| the option of selling the company for a lot of money if a nice
| offer comes along. Sure it won't be making me a billionaire,
| but I can easily see myself building generational wealth here.
|
| My country has public tax records for all companies over 250k
| revenue. The story is very often with product companies that
| they have burnt 2, 5, 10 million to achieve 2-3m ARR while
| still making a loss.
| ramesh31 wrote:
| This works in your situation. It does not for most Americans.
| Your current total profit would barely support a small
| family.
| reedf1 wrote:
| You can also have fast equity and slow cash. This is kind of
| oversimplifying business accounting. Learning some basic
| accounting may quite literally pay dividends for any project.
| j0rd1smit wrote:
| Any suggestions for good basic accounting learning resources?
| dugmartin wrote:
| I have no association with the author but this site has been
| a good search result source for me over the last few years
| when I've had questions:
|
| https://www.accountingcoach.com/
| windward wrote:
| I think a good chunk of services I receive from small businesses
| are underpriced due to people not realising the business they're
| starting has an upside similar to being an employee but with much
| greater personal financial risk and working stress. There's
| really not that much scalability to something without franchise
| potential.
| michaelt wrote:
| Perhaps the personal financial risk and working stress isn't as
| great as it might seem?
|
| Imagine I'm a qualified plumber. I've got my own tools,
| vehicle, and insurance.
|
| I can work as a subcontractor for a local plumbing business.
| They'll pay me $250 per day when they have work for me. I get
| no income when there's no demand, and I get no holidays or sick
| pay.
|
| Or I can start my own plumbing business, and charge customers
| $100 per hour. Sure, I've got to pick up the marketing and
| giving quotes and sending out invoices - but if I can get the
| work coming in, I get a lot more money.
| onion2k wrote:
| _A cash business can have quick linear growth, whereas an equity
| business will have slower but exponential growth._
|
| ...or not. Businesses do fail. A cash business and an equity
| business are just as likely to fail as one another. Working in
| the cash business means you 're realising the value when it
| happens, rather than 'banking' it to realise a compounded value
| later. If the business fails for any reason you'll have been
| _much_ better off working in the cash business. This is the
| downside risk of working for equity.
| jcalx wrote:
| Not exactly the same but this reminds me of Joel's Strategy
| Letter I [0] regarding knowing what kind of business you operate,
| and consequently how you should grow it.
|
| [0] https://www.joelonsoftware.com/2000/05/12/strategy-
| letter-i-...
| DrScientist wrote:
| He references Amazon as a land grab play - sure - but it was
| also a cash generation machine - I don't think Amazon raised a
| huge amount of capital - didn't it mostly funded growth via
| revenue?
| 0wis wrote:
| At first, Amazon was exactly the kind of Equity business OP
| is writing about. And it was hugely criticized about it [1,
| for example]
|
| [1]:https://www.computerworld.com/article/1377261/bezos-says-
| ama...
| graemep wrote:
| The usual value of equity is the cash it can generate. This is a
| wordy way of saying:
|
| 1) that some businesses will be profitable short term, and some
| in the long term and it can be worth sacrificing one for the
| other as you end up with a more valuable business, and, 2)
| sometimes you sell a business for a lot more than its value as a
| standalone business, for various reasons - for example it lets a
| big business fill in a gap in their product line, or remove a
| potential future competitor, or remove a low cost alternative to
| their existing services/products, or help them sell more of
| something related, or gather more data..... or are just
| irrational at times.
|
| The phenomenon in two is common in technology businesses, but is
| not common elsewhere. its most common during bubbles.
| codelion wrote:
| that's a good point about the strategic value exceeding the
| standalone business value... i think a lot of acquisitions are
| driven by that, especially in tech. it's interesting how much
| "potential" gets priced in, even if it's not immediately
| obvious how that potential will be realized.
| graemep wrote:
| It is usually the justification trotted out to justify
| acquisitions.
|
| In general (not tech in particular) it turns out to be false
| more often than it turns out to be true. Large acquisitions
| tend to lose shareholders money but benefit management
| (because they profit more from running a bigger business).
| nicgrev103 wrote:
| Do not read this as- If you have slow growth you have an equity
| business. It's more likely you just have a shitty business.
| shooker435 wrote:
| Or you haven't found product market fit yet, which sounds like
| what happened in the Kit.com example referenced in the article.
| throwway120385 wrote:
| I think better advice here is to say that you should plan to
| spend time learning enough about the field you're trying to
| enter that you can see whether you are working toward fit or
| whether you're working away from it. In other words
| everything that you should do when building a new product
| should be geared toward quickly validating whether what
| you're building is what people want. If you don't have a plan
| for market validation you don't have a business yet.
| relaxatorium wrote:
| It never fails. If someone mentions "selling courses" as one of
| the best examples of a business they can think of, their line of
| business is "self-help guru/grifter".
|
| He even has the "how to have better sex" book out there for you
| to buy.
| arthurofbabylon wrote:
| What are some indicators of the type of business one is running?
| Consider that in a short period's assessment both styles (cash
| and equity) might generate cash, both might grow over the
| interval... But what matters is what happens 5 years or 10 years
| or 20 years later. What indicates, in the first few months,
| whether or not you are planting a tree or planting perennials?
| shooker435 wrote:
| There's a hidden glimmer of wisdom in here, which is to let your
| (cash) customers contribute to funding your (equity) business
| growth.
|
| My theory is a niche consulting firm can perform services to make
| enough money to build out a product, and better yet, they're
| being paid to learn about user requirements along the way.
|
| I'm on a similar journey right now, and it's always difficult
| balancing the dopamine and temptation of a short-term cash
| injection at the expense of development time spent on the core
| product we're scaling.
| ahoog42 wrote:
| This is exactly how we built viaForensics in 2009. For the
| first five years, we performed mobile forensic investigations
| and gave trainings based on the Android and iOS forensic books
| we wrote. We were able to self fund software development for
| the first five years. When we moved from forensics to mobile
| app security, we required more capital to build our automated
| software which led to our Series A.
|
| Having an established business with customers in revenue,
| obviously significantly helps in the fundraising process and
| evaluation. The other huge advantage is you can benefit
| significantly from the Qualified Small Business Stock statute
| which provide an exemption/shield on federal taxes when you
| sell that is the _greater of_ either $10m or 10x times your
| valuation at the time of funding.
| pbronez wrote:
| Yes, but it takes strong leadership. Service and Product
| companies have important structural differences in many areas,
| including finance, culture, technology infrastructure, and
| project management. I've seen many companies start on one side,
| try to add the other, and fail hard.
| shooker435 wrote:
| I'm convinced it can only happen if the company is laser-
| focused, or really small.
|
| I also believe resource constraints create innovation, which
| these companies are particularly poised to do.
| shubhamjain wrote:
| The more apt framing of this article would be something along the
| lines, of "The Agency Trap." The author grew his marketing agency
| to $1M quickly. That might sound great for HNers here, but there
| are reasons why such businesses don't attract handsome
| valuations. You always have to keep grinding to keep the inflow
| of customers, you're never free, and growth is directly tied to
| the number of employees. Additionally, such business can have
| severe ups and downs depending upon market conditions.
|
| Building a product, on the other hand, is slow at the start but
| after a point, the rewards start showing up. The inflow of cash
| is consistent and keeps growing while the costs remain the same.
|
| There's nothing wrong with the agency business, but it'd be a
| smart bet to use at least some of the proceeds into building
| something long-term. Some agencies, notably 37signals, have been
| quite successful doing that. Most, though, never do it.
| lumost wrote:
| Most B2B firms live in the grey area between consultancy and
| product for most of their lives. I've known of more than one
| database company with greater than 50% of their HC tied to
| bespoke asks from top clients.
|
| In my opinion, the difference is really in whether the core
| founders can scale super-linearly with HC, and whether you can
| maintain a wide enough spread of clients that you can afford to
| lose a few of your biggest and not care beyond the signal you
| get on how your product is doing in the market. Practically,
| every top B2B startup fails the latter test to some degree.
| bluGill wrote:
| If you run an "agency" business then you should always be
| promoting junior employees to full partner. They start our
| doing work that you find for them, but after a few years of
| training from you they are now bringing in their own work and
| should be treated like an independent business owner in your
| space that you agree not to compete with (which would be
| against monopoly laws if you were not the same company) and
| once in a while one covers for the other for vacations/sick.
| Lawyers regularly change the name of their company to reflect
| changes in who is partner.
|
| Not all employees become full partners. Most do not, but it
| should be clear to everyone what hard work is required to
| become a partner and they should see examples of it happening.
| grandempire wrote:
| This is an interesting idea. I started in agencies and this
| is indeed a problem.
|
| It's a good start for junior people to get experience but
| they tend not to stay long.
|
| It also attracts people who can do it all - design,
| programming, animation, etc who become stars, and then wonder
| why they aren't working for themselves.
|
| Generalists like that also tend to navigate poor management
| well (also very common) because they remove the need to be
| managed.
|
| The agencies I was at came to the opposite conclusion - why
| do we even have employees instead of contractors? Which never
| really worked out.
| bluGill wrote:
| > It also attracts people who can do it all - design,
| programming, animation, etc who become stars, and then
| wonder why they aren't working for themselves.
|
| This is why you promote to full partner all the time. The
| people who wonder why they aren't working for themselves
| should answer "I will have all the advantages of working
| for myself, plus the advantages of partners for the few
| places that matter". If you don't promote to partner you
| lose all the effort you put into training that person if
| you did you get someone who can help you once in a while.
| velcrovan wrote:
| I think you make, in miniature, a good example of the case
| for why most businesses should be making most employees into
| equity stakeholders.
| bluGill wrote:
| Most employees don't generate anything that can be taken
| elsewhere.
|
| overall emplopee owned companies are a bad idea because you
| get too invested personally in it. If the company goes
| bankrupt you are out not only your job but also your
| savings.
| velcrovan wrote:
| I'm missing something, how does giving employees a path
| to equity prevent them from having other savings and
| investments?
| bluGill wrote:
| It doesn't stop it but it discourages it since so much
| wealth is in that one basket.
| nadermx wrote:
| Don't keep all your eggs in one basket, unless you
| control that basket
| turnsout wrote:
| Yes--lots of good examples of marketing agencies building
| themselves into product companies, most notably Moz, HubSpot
| and Semrush. This is the way.
|
| In order to scale past $1M in profit, you need to
| professionalize the management of the agency and scale the
| workforce, probably using offshore/nearshore help. I've found
| that a lot of agency owners just don't want the hassle, and are
| fine taking home $1M/year (fair!)
| mooreds wrote:
| > There's nothing wrong with the agency business, but it'd be a
| smart bet to use at least some of the proceeds into building
| something long-term. Some agencies, notably 37signals, have
| been quite successful doing that. Most, though, never do it.
|
| I've been part of a few agencies that spent a lot of time and
| money trying to build products. It is a different focus and
| hard to pull off when you are used to the hustle of agency
| culture.
|
| Two better options in my mind:
|
| - selling a recurring service related to the agency's work
| (hosting for a webdev agency, for example)
|
| - productized services related to your work that are more
| custom than a full product, but more scalable than typical
| agency work
| habosa wrote:
| Or just ... enjoy your cash business? Be your own boss, make a
| good amount of money, do it as long as you can.
|
| Seems aggressive to look at a 5-6 person agency pulling in $1M a
| year and give the advice "now it's time to start your _real_
| business"
| turnsout wrote:
| The article kind of conflates multiple factors and
| oversimplifies. Equity is great, but it's only as good as the EV
| (enterprise value) of the company. All things being equal, a
| company that generates free cash flow is worth more than one that
| doesn't--regardless of whether it's a software business or not.
|
| Taking a long time to get to "break even" is not inherently a
| smart or long-term business play. It could just ruin you. In
| business, cash is oxygen.
|
| Some businesses (especially platforms and marketplaces like Kit)
| simply take longer, because it takes time to build brand
| awareness, develop network effects, and basically hit critical
| mass.
|
| However, the upside of a platform is that the growth is naturally
| exponential--the more people on the platform, the more valuable
| it is to its users.
|
| Because this is so time-consuming and difficult, a platform
| business commands a premium over a more straightforward SaaS
| product.
|
| One path isn't inherently better than another path--there are
| just tradeoffs. And hopefully you go into it with eyes open and
| make those tradeoffs deliberately.
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