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Lesson #2: Lease the Pencils

Guest post by: Christopher Golis

Article Overview: Lesson #2 of Chris Golis's talk 5000 Business plan, 50 deals, 25 write-offs lessons learnt from 25 years as a venture capitalist. Money talks but cash screams.

Lesson #2: Lease the Pencils



If you go to my LinkedIn profile you will see I worked some 25 years as an entrepreneur and venture capitalist. Go to the bottom of the profile and you will see in the Slideshare section a presentation called 5000 Business Plans, 50 deals, 25 write-offs: Lessons Learnt from 25 years as a VC. In this presentation I describe five key lessons that I have learnt and over the next five months I am going to elaborate on these five lessons.

Lesson #2 is Lease the Pencils.

My first attempt at working at a start-up had collapsed after nine months and I was on the street. The message ringing in my ears was that Computer Time International Limited (CTIL) had failed because it was undercapitalised. While this was unfortunately untrue I had not yet had enough business experience to realise this. So whatever happened I was going to work for a company that had capital. A week later I was being interviewed for the dream job. The company was Dialog International Limited and I was going to join its UK subsidiary. Dialog had been formed a group of executives working for General Electric Time Sharing in the USA and UK. GE Timesharing was leading computer time sharing operator. The system used Honeywell computers but Dialog was going to use a timesharing system based on IBM computers with software developed at the University of Pittsburgh. I was going to go to the US learn the system and then return to the UK and be the systems programmer. Remember this was 1966, Dialog had raised $4m in equity and had a $4m credit line worth over $40 million in today’s money. This was serious money and capitalisation was not a problem.

Before I left I was asked by the UK executives to send them a fortnightly report. The USA offices were on Long Island Sound at Milford Connecticut and within days I had organised a rental at a beach house where we subsequently had some great parties. After being shown around the palatial head office I was then sent to the operational offices some 5 miles away were the computers and software staff were located. I set myself the first task of writing a program that showed over the past 24 hours how many people were logged in, how many were programmers and how many were customers. The maximum number of users was around 100, two were customers and the rest were internal programmers. I then asked why we had so many programmers and I was told that in order to compete with GE, Dialog needed to develop a suite of financial applications. I then decided I should try and work out the costs of the organisation and I did this by the famous method of seducing the CEO’s secretary. She let slip certain key numbers over several dinners.

I will never forget my first memo to the UK executives. It began “You bastards...” What I had done was create a monthly cash flow model (remember spreadsheets had not yet been invented) and projected that $8 million would be consumed in around 10 months. I finished by saying that while this was unfortunate I had signed a six month lease on the beach house and I looked forward to an enjoyable summer on Long Island. And PS could I please have an open return air ticket?

And so it came to pass. Dialog collapsed within 10 months. Poor control of cash is a mistake repeated again and again, particularly by start-ups founded by management who have only worked for multinationals. Typically cash collection and payables are done centrally and many MNC managers only have an understanding of revenues, profits and budgets. Cash is something that head office does. Also the perks of the MNC manager, business class travel, entertainment allowances, expensive furniture and fittings, luxury cars are all anathema to the start-up yet MNC managers cannot survive without them. Never forget that while money may talk, cash screams.

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Article Tags: Chris Golis, entrepreneurs, startups, Venture capital



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