Build a Company with Real Value

“I am going to start a company,” said Steve back in 1999.

Steve was an MIT Mechanical Engineer. Smart, personable and driven. He called himself an entrepreneur, and he wanted a bite of the apple. He was caught up in all the dot-com hype of the late nineties. Money was flowing to any startup with a half-baked idea with a reasonable founder pitching it.

I liked Steve and wanted to invest in him if he came up with a good idea. We stayed in touch regularly. He would call me from time to time then drop by so we could brain storm his latest idea. This went on for months.

“Charlie, you just don’t get it.”

At the time, I was running a startup incubator for professional services companies. The model was based in starting companies which needed moderate amounts of capital to get to cash flow positive. I was successful in this investment thesis. The problem was, while I was making single digit millions, the rest of the world was making billions. I was missing out.

But for most of the dot-com boom, I remained on the sidelines. I didn’t get it. How can companies with no revenue be worth billions? My investor experience taught me companies which generated cash at the end of the day were valuable. If all companies did was burn cash, then there ultimately should be no value. The market was clearly saying I was wrong. I was told on multiple occasions “Charlie, you just don’t get it.”

Back in the late nineties, I felt like a man sitting among a room full of people looking at a black wall. But I was the only person in the room who said the wall was black. Everyone else said it was white. I even produced a color chart and showed them. But they all told me I was wrong. This is what it was like to be a cash flow investor in the dot-com boom.

The Wall is White

Well, Steve finally came up with an idea I thought was investment worthy. Mind you, it wasn’t, but due to the frothiness of the market, I thought it was. Everyone had lost their minds, and I finally decided to join them. I agreed. The wall is white. Let’s do it.

I rallied a few investors, and we put in $500,000 in January 2000. The company got off to a slow start, and then in April the public markets began to crumble. By May it was clear to me the gig was up. Company value was once again rooted in cash flow.

I called a board meeting and told the investors and Steve we were shutting the company down and pulling the funding. At the time, we had burned through $300,000, so we distributed $200,000 back to the investors. Some were disappointed at the time. A few months later they were thanking me.

New Signs of Frothiness

We are starting to see the signs of frothiness again. The public markets have become much more discerning. They want to invest in companies who promise cash flow in large amounts. It is tough to go public these days.

On the other hand, we have the unicorns. These are private companies with multibillion-dollar valuations who are eating cash at unprecedented rates. The promise is one day they will be amazingly profitable and will go public. I hope for the sake of all those investors it happens.

Fundamentals win. Companies producing cash are valuable.

Steve and his family moved to Boston shortly after the closing of his startup. He went back to MIT for his MBA and in 2009 started a new company. He is the CEO, and the company is still around. This means Steve figured it out.

Start and build a company which produces cash. That’s value.

Also published on Medium.