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October 21, 2008

When Your Company SHOULD Spend

Cash is king. VCs like Fred Wilson are advising their portfolio companies to be in cash-preservation mode for the very good reason that more cash will be hard to come by and, if obtainable at all, may come with serious dilution as its price. But, if your company has cash, this can also be a wonderful time to spend. In the end you will succeed because of what you DO spend your money on.

Suppose you have much more cash than your main pesky competitor. Assuming that advertising or paid marketing of some sort is effective for what you sell, you can afford to spend to gain market share and be reasonably sure that your competitor won't be able to match you and cancel out the value of your marketing spend. Don't do this, though, if the spend will leave you with less than 24 months running room taking into account that new customers may well increase your operating costs immediately while revenue may take awhile.

Suppose you're in development mode. Good developers are more available at better prices than they have been in a long time. Perhaps you can both shorten your time to market (and revenue) and reduce costs by more hiring or contracting. Remember, though, that many projects go SLOWER the more developers are working on them. You need excellent technical product management to execute this strategy.

This is a great time to acquire a cash-starved competitor or possibly the owner of a related product you can sell to your existing customers; but a few caveats:

  • Don't let an acquiree's cash problem become yours. Be sure any synergies you count on are adequately researched and discounted. Murphy has a law about never achieving the synergies you plan, especially in the time you planned to achieve them.
  • In almost no circumstances use your precious cash for acquisition. Your stock is especially valuable for acquisitions if you have cash and the target doesn't.
  • Acquisitions are very hard and can be fatally distracting. Almost never worth doing unless strategic AND you have executive resources and experience to dedicate to them.
  • Don't pay much for a competitor who is going to fail anyway, especially if it's your only competitor. Better to use your cash to make sure you pick up the customers directly.

Something you may have to spend cash on is making sure your product or service and the pitch for it are relevant to your prospects and customers in these tough times. Obviously, people are looking more for an opportunity to save than to spend. Can you help them do that?

Like all times, this is a time of opportunity. If you're lucky enough to have cash, you're extremely well-positioned. Maybe just hoarding and survival is the best strategy – but maybe you can be more creative. It's worth looking for opportunities.

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