On cash

Cash management is the most important aspect of running a startup. If you don’t have cash you aren’t doing anything. As we move towards launch we are starting to look at the costs we have to meet and working out how much road we have to get to a seed round. With no full time employees we have an extremely low burn rate even if we choose the deluxe servers we have enough to continue developing the product post launch. That’s bootstrapping kids!

We have some natural advantages. Although we are not hackers we have a good spread of skills amongst the founders. I am a lawyer so I can write the agreements myself and get them checked by our law firm. This saves us a huge amount of cash and ensures all our agreements are a perfect fit with our business. We’re also lucky in that one of my friends from Bar school is our lawyer which means we get the services of a serious City law firm which would normally be completely out of our price range.

My other two co-founders are an IT consultant and a management consultant. Although the former is not a hacker he can think like one and with our developers translate our ideas into reality. As well as being great at managing the development process his background means he also sees beyond software development to what the business needs in terms of IT infrastructure and how it will be able to scale. Having this operational insight at such an early stage means we are preparing ourselves as a reliable business from day one. And having a management consultant on board means we have someone who can look at the business with the eyes of an investor when we are preparing our presentations and plans. All in all it means we can run as a proper business without many of the associated costs.

The alternative to cash conservation: more cash

I was thinking about this generally when all the ‘advice from VC’ type blog posts started flooding in a few weeks ago. They all seemed to boil down to: conserve cash. One company which is pursuing the alternative route and trying to raise more is Facebook. Arrington points out they are in a bind, they are growing fast which so their costs are scaling but without a solid revenue model their income is not. This means CFO Gideon Yu is now looking around for alternative forms of finance. The options are:

• Loans: Absolutely no chance. Banks aren’t lending to anyone right now and even if things start to thaw Facebook will be right at the bottom of the list. No banker is going to lend to a company that is burning cash.
• Leasing: Facebook already has $100m in lease finance and I’d be surprised if they could get this extended to cover the type of infrastructure they need.
• Equity: Techcrunch rumours that Yu is in Dubai pursuing this option. On the plus side the type of cash I imagine he is looking for (low nine figures) is not a bid deal to a middle eastern sovereign wealth fund. On the minus side they won’t pony up at anything like the $15bn valuation and maybe not at the $4bn recently used for the staff sale.

So what’s going to happen? I think we may start to see a lot more ads on Facebook. MySpace is making far more money simply by expanding the inventory on pages, with My Ads they have folded it out to allow more advertisers easy access to the inventory. Even still, monetising MySpace is causing problems for Google who shelled out $900m for the privilege of showing ads on that network. This is probably not what Facebook wants to do as Zuckerberg is looking for a more innovative silver bullet solution. Beacon wasn’t it but it shows something as obvious as expanding the inventory would be regarded as a defeat.

Beyond that the only real alternative is drastically cutting costs which means reducing the headcount from 700. This may not be a bad thing as it looks to me like Facebook is getting overweight. This means it starts to get all the problems of a large business – bureaucracy, infighting, slower response times – and none of the benefits – solid revenue. In the meantime the wildcard is users. Facebook’s main attraction was its clean design, if this starts to get gummed up with more and more ads they may start using the site less or even looking to another network. Add all that to discontentment with the redesign it would be very interesting to see what happened if someone launched a network today which looked like the old Facebook. Maybe this is the time for StudiVZ to launch its English version.

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