Maximizing Profit vs. Maximizing Survival

A lot of criticism has been aimed at venture capitalists the last few days. The VCs are telling their portfolio companies to get ahead of the curve and conserve cash right now, and companies are starting to take their advice.

The criticism is coming from people who don’t understand that the world has changed in the last week and that companies need to change with it. And so they’re asking why VCs waited until now to tell everyone to conserve cash. Others are saying the boom is the VCs fault, and for them to lecture companies on conserving cash is ironic.

Fred Wilson wrote about this issue today and says VCs have a responsibility to give their best advice to their portfolio companies: “It’s all about acting responsibly and making sure we all survive to fight another day.”

But he doesn’t address the issue head on. I will. What we’re talking about is the goal of profit maximization, which is what every for profit business needs to aim for or go out of business. In the good times, that means growing intelligently. In the bad, it means maximizing your chances of survival.

Irrational Argument No. 1: The VCs Made This Happen

First, the downturn has nothing to do with the venture capitalists (in fact, it has nothing to do with Silicon Valley, this time). They have one job: generate the best return they legally can from their investors’ money. In boom times deals get competitive and VCs make independent decisions on what deals to bid for. Companies also have to pay more for people, resources, office space and advertising in boom times, which means they spend more money and have to raise more money. If you think venture capitalists are being irresponsible (or worse, evil) by investing money in those companies that they think are good bets, you’re just not getting how the whole system works.

Let me put it this way - if VCs ignored the economy and always invested super conservatively so that no one could accuse them of being irresponsible, they’d go out of business after their first fund failed to return capital to investors.

Irrational Argument No. 2: VCs Should Have Told Companies To Conserve Cash All Along

This is another argument that ignores the fact that people try to adapt to a changing world. At all times companies need to profit maximize. That means maximizing revenue and minimizing costs. Those goals are not aligned, however. Sometimes a company spends money on research and development to create future revenue streams. How much they spend is based on their own rational decisions on their financial health, the state of the economy, and their projections for the demand of a new product.

In good times, when core businesses are relatively safe, it makes sense to expand by hiring new people and developing new products. Or spending money on advertising and PR.

When times are tough, companies have to change strategies. They’re still maximizing profits, but they need to plan for tighter capital markets (really important to unprofitable startups) and harder revenue as advertising and other spending decreases.

Just like a bear in the woods (I imagine) has to slow its activity in the Winter as food supplies dwindle, startups need to go into cash conservation mode to increase their chances of survival when the market slows. They need to be prepared for a hit in revenue, and they know they can’t necessarily go to the capital markets to get money to stay in business.

But to argue that a company should always cut costs to the bare minimum is the same thing as asking that bear to act like it’s Winter in the Spring, just because someday Winter is definitely going to happen. All you end up with is a dead bear.

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[ashizashiz:]

I sit here at my desk at work---for now---and gawk wide-eyed in utter amazement at the depths to which human beings will go in order to satiate their lust for power and their Midasian greed. Paulson, Bush, Bernanke: soucndrels, one and all. Scumbags of the highest order. Liars who would sell their souls to the devil, who would swear on the lives of their families, that they are telling the truth. But no amount of dissembling or obfuscation can change the laws of nature: reality, in the end, always wins out.

Toxic “assets” in the tens of TRILLIONS of dollars fill the casks and vaults and safes and basements of the world’s major financial institutions. Worthless pieces of paper that, when exposed to the light of day, will bring the global economy as we know it to its knees. There is no escaping this reality. None. The laws of nature will eventually pull the curtain back on the Oz-like charade that is being played out in Washington and Paris and London and Berlin, and the global economy will shatter.

And so in the intervening days/weeks/months, Paulson and Bush and all of their minions pump trillions of dollars of “money” into these so-called “healthy” institutions in order to loosen the credit market so that, at least for the time being, things regain the appearance of a recovery. And an election takes place next month, and the DOW “rebounds” to about 10,400 give or take, and a few of the largest banks begin easing credit restrictions and reluctance to take on risk, and all seems to be moving in the direction of eventual better times. And yes, recession exists, and the economy is tight, and jobs are lost, but the new President goes on TV and tells the people that, while times are tough, we are a strong people, and we will recover. (Meanwhile Bush and Paulson and their minions have moved to a small island off of the coats of Costa Rica and hired Blackwater to protect them from the rest of the world.)

But soon thereafter, at some unknown moment in time, all of the fake money, the supposed assets and capital that the Bushies have pumped into the system---all of the trillions of dollars in guarantees promised by the countries of the EU to their financial institutions---all of these monies become exposed for what they really are---MORE DEBT. More lies, falsehoods, specters. Trillions of dollars THAT DO NOT IN FACT EXIST, loaned to banks and insurance companies and auto makers in “hopes” that they, somehow, will be able to make some money and build capital that, at this point, is simply a wraith in the night. But of course this plan fails. It must fail. It is just another layer of the grand ponzy scheme of the millennium, perpetrated on the people of the Earth by a handful of greed-mongering bastards and sons-of-bitches.

By way of metaphor, this situation is akin to building a tower on unsteady ground, and instead of deconstructing the tower and starting again, you simply make the tower taller and claim to the people that this truly is the most wonderous tower in the world, a monument to the strength and resolve of the people. But it must fall. The laws of physics demand it. And the same is true of our current economic joke.

And so I sit here and watch economist after economist, legislator after legislator, president after prime minister after finance minister, claim that the plan “will” work. And they are all lying.

2008 Oct 14 10:09 AM