The traditional defense of negative cash flow is that excessive cash means that resources are idle that could be working towards growth. This makes sense in winner-take-all markets, where getting marketshare fastest means establishing a semi-monopoly and ensuring years of profit.
I think there is some validity to that thinking, but there is an implicit assumption that one could choose to step on the brakes on growth at any time and resume positive cash flow. For many firms, that is simply not the case. The firms in that position are more desperate for growth, and in my opinion the most dangerous to all. When backed into a financial corner they make comprises that harm their customers or the ecosystem as a whole.
Therefore, I think it’s crucial to distinguish strategic cash burn vs unsustainable business model. Metrics like negative return on ad spend (ROAS) are decent indicators.
I always looked at negative cash flow as default dead, regardless of profitability. Long term survival is at risk when you run out of cash to pay invoices, profits or not. All that needs to happen is financing, either by banks or investors, to stop.
> I think it’s crucial to distinguish strategic cash burn vs unsustainable business model
The only thing I don't like about the idea of a strategic cash burn is that I'd much rather see a strategic cash dividend or share buyback. Any company can hire someone who will find a way to justify spending assets for some potential ROI, and it's pretty easy to spend a company right into bankruptcy.
> This makes sense in winner-take-all markets, where getting marketshare fastest means establishing a semi-monopoly and ensuring years of profit.
I think the rest of your point is sound, but growth is important in all markets, regardless of any opportunity to monopolize. Forgoing investment in growth is an opportunity cost for any company in any market.
I think there is some validity to that thinking, but there is an implicit assumption that one could choose to step on the brakes on growth at any time and resume positive cash flow. For many firms, that is simply not the case. The firms in that position are more desperate for growth, and in my opinion the most dangerous to all. When backed into a financial corner they make comprises that harm their customers or the ecosystem as a whole.
Therefore, I think it’s crucial to distinguish strategic cash burn vs unsustainable business model. Metrics like negative return on ad spend (ROAS) are decent indicators.