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Comment by gatsby | Hacker News Reader

Investors frequently say things like this:

“Am I at, or can I get to, profitability on the money I have?...(If so) Go raise “opportunistic money” from your existing investors at a good or great price.”

If you’re profitable and believe that your customers will continue investing in you, you should think long and hard about raising more capital as “the answer.”

Raising more capital is sometimes the answer, and it’s an investor’s job to convince you that raising capital is always the answer.

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That statement made me feel uncomfortable. Isn't it exactly this type of attitude that creates financial bubbles in the first place?

Without a plan, or even a good reason, for that money how does it contribute to making your business more profitable or resilient to the vagaries of your market? In the short term it'll keep you afloat but that isn't going to be a big consolation when the money does run out. Stock piling cash in exchange for huge amounts of equity seems totally irresponsible.

> Bottom line: In almost all of the cases above, my advice is to build a war chest of capital so that you can deploy it in the down market.

What I think he is saying is that in a downturn things can get tough if you don't have enough cash to get through it, and it will be harder to raise more money if you need it. But, in a down turn everything also gets a lot cheaper so if you do have the cash then then you can really capitalize on this and emerge from it as the leader in your sector.

Yeah, I can definitely see the argument for having a war chest. Building it by exchanging a chunk of your equity for it in the hope that on the other side of the storm (what is that old fable about economists correctly predicting 11 of the last 7 down turns?) you can make that back and then some feels a little too much of a gamble. You'd have to be incredibly lucky to get the timing right.

Building a war chest by maximising profitability and minimising costs I could definitely understand.

Perhaps I just don't have the guts for it though.

Perhaps you are a programmer and not an investor so you are going to have a different perspective. (I tend to agree your view btw...)

Big companies often waste too much shareholder money buying back stocks when prices are high. It serves them better in the long run to raise money they don’t need when their stock price is high, so when the market and stock price takes a downturn, they have more capital to allocate for their business while also buying back less expensive stock, rewarding investors doubly once the market picks up again.

Shoring up the balance sheet with additional equity capital to protect against a short-term drop in revenue isn't a bubbly strategy. It's just good corporate finance.

I think you answered your own question in 2 consecutive sentences:

> Without a plan, or even a good reason, for that money how does it contribute to making your business more profitable or resilient to the vagaries of your market? In the short term it'll keep you afloat but that isn't going to be a big consolation when the money does run out.

Emphasis added.

To a large extent, Amazon got lucky by raising a ton of money right before the market crashed, giving the company the cushion it needed to ride out the turmoil of the early 2000s.

https://www.vox.com/new-money/2017/4/5/15190650/amazon-jeff-...

Isn't there an element of survivor balance there though? It worked for amazon but how many dozens of companies raised heavily and still failed to "capture the flag" on the other side?

It doesn’t matter - if you’re the founder of a company and you were able to convince investors (equity) or banks (debt) that your money losing venture can eventually make money, why not continue taking money from them? If the venture fails, your investors and/or bank loses money and you go out there and either start another business or get a job.

On the other hand, if it’s your own money, don’t get caught up in the sunk cost fallacy.

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