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Cash is King

Tech startups are the wild west. Trends come and go with dizzying speed. But amidst all the innovation and disruption, one timeless principle stands firm: cash is king. As a seasoned tech angel investor, I’ve witnessed firsthand the cycles of exuberance and caution that define the startup ecosystem. And there’s been a noticeable shift—a renewed emphasis on cash conversion and a clear path to profitability. Here’s why cash is reclaiming its throne and why it’s more crucial than ever for startups to prioritize sustainable growth.

Growth at all costs

For many years, the tech industry has been enamored with growth at all costs. Startups would prioritize rapid expansion, often at the expense of profitability. The mantra was to capture market share, disrupt industries, and worry about making money later. This mindset fueled the rise of unicorns—startups valued at over a billion dollars—many of which operated for years without turning a profit.

The tides are turning

However, the tide has started to turn. Investors are becoming increasingly wary of companies with sky-high valuations but no clear path to sustainable revenue generation. The failures of high-profile startups that flamed out spectacularly despite massive funding have served as cautionary tales. We’ve seen companies with promising technologies and enthusiastic user bases collapse under the weight of unsustainable business models.

In today’s landscape, investors are demanding more than just flashy growth metrics. They want to see a solid plan for how a startup will eventually become profitable. This shift in investor sentiment has put the spotlight back on cash—specifically, on a startup’s ability to generate it and manage it wisely.

Cash conversion is the process of turning sales into cash—a critical metric that indicates how efficiently a company is operating. Startups that focus solely on top-line growth may overlook the importance of cash conversion, leading to cash flow problems down the line. In the past, many investors were willing to overlook negative cash flow in favor of growth potential. But now, there’s a growing recognition that cash is the lifeblood of any business, and without it, even the most promising ventures can falter.

Post-pandemic realities

The COVID-19 pandemic served as a wake-up call for many startups. The economic uncertainty brought on by the pandemic highlighted the importance of having a strong financial foundation. Companies that were overly reliant on external funding found themselves vulnerable when investors tightened their purse strings. Those with healthy cash reserves, on the other hand, were better equipped to weather the storm.

As an angel investor, I’m increasingly drawn to startups that prioritize cash conservation and have a clear path to profitability. These are the companies that understand the importance of sustainable growth and are willing to make tough decisions to ensure their long-term success. They focus on building a solid business model, optimizing operations, and generating positive cash flow from their core activities.

Not getting stuck on the sidelines

Prioritizing cash isn’t just about survival—it’s also about seizing opportunities. In today’s market, having a strong cash position gives startups a competitive edge. It allows them to weather economic downturns, invest in innovation, and take advantage of strategic opportunities as they arise. Cash-rich companies have the flexibility to pivot when necessary and the resources to scale rapidly when the time is right.

So, what does this renewed emphasis on cash mean for startups? It means taking a more disciplined approach to growth, focusing on sustainable revenue streams, and being prudent with spending. It means prioritizing profitability over vanity metrics and building a business that can stand the test of time.

Founders, as always, have to make tough choices

It may mean saying no to certain opportunities that don’t align with the company’s long-term goals. It may mean reevaluating expenses and finding ways to operate more efficiently. And it may mean having the patience and perseverance to build a business that grows steadily, rather than explosively.

But for those who embrace the principles of cash conservation and profitability, the rewards can be significant. Not only does it increase the likelihood of long-term success, but it also attracts investors, like me,  who are looking for sustainable returns, rather than just chasing the next big thing.

Cash is the ultimate arbiter of success

Investors, particularly in tech, are placing a renewed emphasis on cash conversion and profitability, signaling a shift towards more sustainable growth models. For startups, prioritizing cash isn’t just about survival—it’s about seizing opportunities and building a business that can thrive in any environment. By focusing on cash conservation and profitability, startups can set themselves up for long-term success and attract investors who share their vision for a more sustainable future. Cash-rich or cash-strapped, enjoy the ride.