When Money is bad for Business...

All of us know money is a great friend in need when it comes to business. The whole investor business stems from the insight that money is no longer the scarce resource it used to be, and the infusion of external money into a business can accelerate a business many times more than the organic reinvestment of profits can. Imagine a unit-profitable business growing as a straight line from year to year - spending more money than the business has earned can bring the EBIT line down below zero for a period, but then it reemerges a few years later much higher than the straight line did. So far so good, so what's the twist in the tale?

There’s another angle to money, which is not so nice. There’s a reason many parents aren’t giving their children easy money (Bill Gates too, you’d know). Money can make one lazy (e.g. I'll get to work but let me recharge my batteries first), but more seriously, could cause delusions (e.g. I’m popular because I’m charming and not because I’m rich). Similarly in business, having more money than you need can destroy you. Let me illustrate how.

Let’s say you’re running an eCommerce business today in India. Let’s assume the low prices on your portal are partly due to the efficiencies of your model (good sourcing, no inventory, bulk-breaking, private-labels etc) and partly due to discounts on top funded by the business (marketing discounts, signup benefits, app-download incentives, site-wide discounts, co-funded cashbacks and so on). There are no points for guessing which of the two is more difficult to achieve. Now what happens in a cash-rich company is that the first approach is simply considered a waste of precious time that could instead be spent on multiplying the GMV numbers through, to put it crudely, bribing customers to buy.

In other words, the availability of money will drown the intelligence and effort your employees and partners invest, which bad news. The other issue, which is also non-trivial, is that businesses that live through hard times gain a lot of resilience, efficiency and humility. Hard times are as necessary for these learnings as sunlight is for the production of vitamin-D. Just because the investor market has been good yesterday and today doesn't mean you don't create a shock-proof business.

The last bit is about rich businesses who say they run themselves as if they are poor - it's a really difficult thing to do - it's like dieting with a fridge-full of goodies. If you have smart employees, they know how much is in the bank, so towing a hard line will just lead to lack of trust.

What is easier, and much better, is to go the old-fashioned way. Postpone the flood of money. You know your industry dynamics, so do what you have to, but whenever possible, ensure money is raised and used as late as possible (which will also reduce dilution of ownership to a minimum). Try raising and using money for investments (like building a better product, or fulfillment-infrastructure) rather than expenditure (like spending on discounts), and try valuing the "build-for-tomorrow" people in your organizations, the "don't-spend-everything-today" people in your organization who are getting less heard each day.

Initially published in ET Retail on April 29, 2015