How to Optimize Use of Capital

0:00 Welcome back. So in the last few weeks, I've had the same question from a handful of entrepreneurs.

0:07 And it's basically, so I worked hard and I raised all this capital. How do I decide what are the best things to put the capital to work towards?

0:16 What's going to make my business the most successful? So I like boiling things down to the ridiculously simple.

0:23 Let's go to the whiteboard and take a look at it. So when they were pitching, most entrepreneurs pitched something that looked like this.

0:30 to get a bunch of money. I'm going to spend that money. As I spend, my burn is going to get less

0:34 and less. And I'm going to get to the point where I'm positive burn and I'm cashflow positive.

0:38 And I've got a buffer in here and everything's great. And that's usually the kind of pitch that

0:44 we see. Unfortunately, that's not reality. They raise the capital and then it turns out that it

0:52 always takes longer and it always costs more money. So the trajectory of cash ends up looking

0:57 something like this. But I do believe that if they had enough runway, they would actually

1:06 get to cash flow positive. Most businesses that we see from smart entrepreneurs and big

1:11 markets will ultimately be successful if they don't run out of money first. And the reason

1:18 that most businesses fail is because they run out of money because cash to a business

1:23 is like oxygen to a human. If you're without it for more than two minutes, you're dead.

1:28 So as soon as you recognize that you have this position that I will call cash out,

1:34 how do you decide what things you should be taking on and what things you shouldn't?

1:38 And I think the answer's in the numbers. So let's go up here to this graph. We'll mark the same

1:43 cash out position. And here's how I think about it. There are things that you invest in. They

1:51 It could be marketing.

1:52 It could be products.

1:53 It could be salespeople.

1:56 And you make an investment.

1:57 You spend cash.

1:58 And then you should get a return on that investment.

2:01 And cash builds up, builds up until it's positive and it's paid back.

2:04 Everything that you spent and then some.

2:06 And it continues to pay back.

2:09 You'll see that at the cash out time that we marked here, you actually have netted positive cash.

2:15 You spent a bunch of money.

2:16 You've earned that money back and then some.

2:18 So in this particular case, you've actually moved the cash out number to the right because you have more cash extending your runway.

2:27 Things like this are good.

2:30 However, there are other things you could spend your money on that would cost the same amount but have a slower payback, a slower trajectory.

2:40 Something like the one in blue, at the point at which you'd run out of cash, you actually have a delta here of I've spent cash.

2:47 I've only earned back some of it, so I'm in the hole.

2:50 It actually moved your cash out time to the left, giving you a shorter runway.

2:56 So if you believe that your business is ultimately going to be successful,

3:01 if you have enough runway, as I do,

3:05 then when you see your runway having a finite period of time,

3:09 in other words, you do have a cash out time,

3:11 you should be evaluating every spend as, do I spend that money?

3:15 do I get more cash before my cash out extending cash out or less and then the answer becomes

3:20 really simple the answer is in the numbers