Re:Why Positive Cashflow Matters
by AmericanChopper on Monday September 09, 2019 @05:10PM
(#20922527)
Not all negative cash flows are created equal. For most high valued companies that are cashflow negative, the deficit should represent a portion of their sales and marketing budget. In that case they are literally choosing to be cashflow negative as an investment in growth, and could choose to become cashflow positive at any point by reducing the sales and marketing budget. Obviously this depends on things like their CAC and LTV being healthy, but investors aren’t stupid, and in isolation being cashflow negative isn’t an indication about the sustainability of the company.
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Your case (LTV > COGS + CAC) is accounted for in a standard DCF model. If you're planning to be cash flow negative for 30 years because of R&D costs then that's fine but you better have a model where 30 years from now you're able to beat 30 years of interest (and by quite a bit given the risk profile).
Grandparent was talking about the case where CF never goes positive. In that case the company in theory still has some shareholder equity by way of assets. But in reality, especially for something like a software company, there aren't going to be a lot of assets to strip out when you unwind the company.
Re:Why Positive Cashflow Matters
by AmericanChopper on Monday September 09, 2019 @05:31PM
(#20922672)
The existing customer base is an asset. If you can profit from taking a negative CF company, firing all the staff and collecting subscription fees from the existing customers until they all churn, then you have value that can be extracted from the company. These ”maintenance mode” acquisitions aren’t even that uncommon.
But that said, it’s not exactly obvious which funded companies will never be profitable. If it was then you’d expect it would be quite hard for them to secure funding. This is simply a conclusion that many HN commenters love to jump to when deriding a particular company, usually without a very good understanding of the company’s financials, or even of finance in general.