Why cash is king

Oftentimes I am asked what my plan for exit is when I invest in a company.  Sure I have a plan when I invest, but it is impossible to predict the future.  The best plan in my mind is to make sure that any company we invest in has a tremendous market opportunity with a real business model and high operating margins that can eventually generate real cash flow.  As an entrepreneur, it is important to invest for the long term and not make short term decisions because you think you will be acquired (see an earlier post – Companies are bought and not sold).  Ultimately what will give you the best chance for success is focusing on the things that you can control – building a real business with a real economic model that can generate cash from internal operations vs. through external financing.  Yes, this is easier said than done, but when this happens you can do things like Bob Parsons, CEO of GoDaddy, recently did (via Techmeme)- pull his IPO.  As he discusses in his blog post:

Why I decided to pull our IPO filing.
You might ask, why, if Go Daddy’s situation has never been better, did I decide to pull our IPO filing? There are three reasons for doing so:

1. Market conditions
2. The Quiet Period
3. We don’t have to go public

Market Conditions.
The state of the stock market for an IPO is as uncertain as it could be. In fact, the USA Today published an article that IPO stands for “Investor Pain Overload.”   This is due, in large part, to the overall "bearishness" in the market.

Consider the situation from a global perspective and follow it all the way to Wall Street.
We have war and escalating hostilities throughout the Middle East, with no end in sight. Oil prices are skyrocketing. Tech stocks, in particular, are once again taking a beating on Wall Street, due in part to some investment banks cutting their ratings on the U.S. technology sector. Rising interest rates have played a key factor. Their steady rise over recent months has put adverse pressure on stocks overall.

In a bit of irony, last week when the SEC informed us our filing was accepted as being ready-to-go, market conditions were a terrible mess. In fact, inflation worries, say analysts, are bleeding into the tech sector. For all these reasons, I liken the timing of us getting the ‘green light’ to a person being told his car is in perfect condition just before it’s about to be driven into a wall.

I don’t expect market conditions to correct themselves for sometime.
I feel we owe it to ourselves to withdraw our filing until better and more stable times arrive

What if you were a cash cow and nobody noticed?
This seems like an excellent time to address an issue that has bugged me since the moment we filed our S-1.

After we did our filing, I was surprised that not one journalist took the time to look at our cash flow statement to report our actual results. Instead, each and every one of them hastily reported that Go Daddy filed to do an IPO and that we had never turned a profit. Not one of them took the time to look at our cash flow statements to see that we generated significant operating cash flow during each reporting period.

The accounting method we are required to use.
Because GoDaddy.com sells domain name registrations, we are required to use an accounting method that is ultra conservative.

So one of the principal reasons that Bob lists for pulling is that he doesn’t have to go public because his company is a cash cow.  When you print cash like GoDaddy, you can control your own destiny.  While the company doesn’t look profitable on an income statement perspective because GAAP requires GoDaddy to recognize a domain name registration over the effective period of registration, GoDaddy is in a wonderful cash position because it collects the cash upfront when someone buys the domain.  This is quite similar to a lot of SAAS oriented businesses that may sign up customers for one year contracts and collect the cash today but recognize the revenue over the life of the contract.  When these types of companies grow quickly GAAP numbers may not tell the full story.  And as I am sure many entrepreneurs know, you can’t spend GAAP Net Income but you can spend cash.  As Bob Parson summarizes:

To date, Go Daddy has been completely self-funded –we have been cash flow positive since October 2001, and – whether anyone has noticed or not — continue to generate healthy cash flow from operations. We’ll manage just fine without the IPO money — thank you.

When in doubt, remember cash is king.