A Cash Cow Business

26 February 2012 | talking about Leadership

Venture capital investments are great. It allows people to focus on the business instead of day to day cash flow issues. For some businesses, venture capital is the way to go. There is no way Steve Jobs would have had a consulting practice on the side to help grow Apple. He needed all in complete focus to succeed. However, one mistake I think many entrepreneurs make is they think they need outside investment to grow their business. They get so focused on raising money they forget to look outside the box. One approach I have used for years to fund businesses is what I call a cash cow business. This is nothing more than one business funding the growth of another more important business.

Some businesses generate profits from day one - consulting business for example. Another example would be some sort of retail or service business. You mow someone’s lawn and they pay you. Profit on day one. Why not start one of these simple profit-at-day-one businesses to fund your dream business? I can illustrate this with two examples from my life.

Example #1.
When I was running my real estate development and investment business in the early 2000s I needed capital to fund my construction projects. Upon buying property we would build new or do a massive remodel, which cost money. In order to be successful I needed to build a team, which cost money. To solve these problems and cover these costs, I started a wholesale distribution company called OverstockMe (I know, crappy name). I was more or less a drug dealer. I would buy big pallets of high demand products, break them up into smaller batches, and sell to ebay sellers and other retailer types. It was a pretty simple model. I would setup a deal and often only hold the inventory for a small period of time. This business would have been very hard to scale into something big - in addition to that, I was not overly passionate about it. I knew the business would expire at some point, but still, with very little effort it kicked off enough free cash flow to help fund my investment business.

Example #2.
As many of you know Cloudmanic Labs, is my primary focus these days. We are building some pretty amazing software-as-a-service products for small business. Building and maintaining these products is pretty expensive and it takes a long time to really see any great profits. These products have a pretty high up-front cost. To help fund our growth, we have a consulting business. We leverage the skills we use day in and day out for our own products by offering consulting services - which, as I mentioned above, profit from day one.

You can even consider your day job as your cash cow business. Use your W2 paycheck to fund your dream business. There is some truth to the saying “Don’t quit your day job”. Yes I know I just bastardized the saying smile, but it fits this concept like a glove.

In a way Warren Buffet has stolen my model smile. Use the free cash flow from boring yet stable businesses to fund the core.

Yes, of course there is a drawback of not being able to truly focus on the core business. This is tough. However, I would also suggest that focusing energy on raising investor capital, and answering to a board of directors is also very distracting. I just think people should think outside the box and not get so focused on one single solution for raising the required capital to fund their dream business.

 

tags: venture capital, cash flow

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