Cash—Kingmaker or Killer?

I’m excited to have a guest post today from Kyle Harrison. In the past, he’s worked at firms like Coatue and Index Ventures, and for the last few months has been writing about the rapidly evolving VC landscape at Investing 101. Today he’s going to dive into the examples he’s seen of when cash is a king maker and when it's a kiss of death. 

What's In a Moat?

For the last few years in startupland, cash was a commodity. Startups were stuffed full of capital from family offices, hedge funds, and me and other people like me in venture capital. Now however, the paradigm has shifted. Cash is more difficult to raise and the world is increasingly giving 2001 popped tech bubble vibes. If this apocalypse comes to pass, investment dollars will become more scarce. Cash will cease to be a commodity. The key question that all entrepreneurs and investors must ask is when does cash become a competitive advantage? 

Everyone loves to talk about moats in business. Are they defensible? Are they differentiated? One heated debate is around whether a moat can consist of cash. However, it isn’t just whether or not it is a “moat” but whether it’s defensible. Does that cash allow a firm to maintain market share and profits? 

In building a business there are no sure bets. You can have the most tenured executives, the most advanced technology, the strongest tailwinds, and the most direct access to capital and still fail. You can also have little more than an idea and a computer but still be wildly successful. Cash can only ever be a part of the equation.

When you look at a number of case studies in industries that have sucked up a lot of the venture cash floating around you see some insightful patterns. The advantage a business can get from having a huge amount of cash typically has more to do with the underlying market dynamics, maturity, and user economics, than it does with the cash itself. In other words? All cash-spending activities don't create equal results.

There is a common thread across industries that have come up as I've dug into the cash habits of the rich and the famous (companies). The first is a mindset. Some of the companies that have used cash most effectively have had a particular mindset while the ones who most abused cash had a very different perspective. The second is a focus on particular metrics. When thinking through how much of an advantage cash can provide there are some key metrics that can be most telling. Once you understand the mindset and the metrics around cash we can walk through case studies like Uber or Snowflake and better understand the way these companies have operated. Up first? Mindset.

A Paranoid Abundance Mindset