Plug is more important than cash, mainly because money is just a commodity for high return (and high risk) endeavors.
In fact, from a historical perspective, it is reasonable to say that money has been always a commodity for bold entrepreneurs engaged with great endeavors. Not always controlled by the same stakeholders, but still a commodity. Centuries ago, for example, the Jewish-French Rothschild family was engaged in financing wars between European royal families. Spanish rulers and private investors financed expeditions to America. British emperors and private shareholders financed East Indian Company expansion in Asia. The Chinese empire financed Zheng He global expeditions. And so on.
Naturally, money flows better with a strong institutional framework and rules of law. This partially explains why the First Industrial Revolution happened in Britain just few decades after the Glorious Revolution. This also clearly explains why private capital currently flows more to the USA than to Russia or China, forcing government-centric investments in both Russian and Chinese enterprises. Money is liquid, after all.
Nowadays, all the hype around Silicon Valley attracts billions of dollars from venture capital firms and private equity companies. Suddenly, piles of cash have become more abundant in the region, fostering hundreds of start-ups and creating so-called unicorns. Still, capital is just one aspect of this unique ecosystem. Keeping this in perspective can help us to properly position cash as a tool instead of a final goal.
During my entrepreneurial career as an advisor to large companies, as a C-Suite executive or investor, I learned a lot about two golden rules in corporate financial management: there is no free lunch and cash is king. The first reminds us that high returns are necessarily associated with high risks. The second shows us that revenue is vanity, profit is sanity, but only cash provides any real outlook on any future enterprise perspectives.
Having said that, it is also true that connections play a critical role in any company. It seems fair to say that money attracts money. Nevertheless, great opportunities speak for themselves, and great opportunities rarely appear out of the blue. They are fostered amidst powerful networks and relationships.
In the past, between the 1950s and 1990s, mass production techniques and access to retail channels were critical for scale. Today, platforms play a central role in the digital economy. Being unplugged means staying irrelevant. Tons of cash are useless without the network effects provided by successful platforms that combine both access to customers with almost zero marginal costs and robust data analytics modeling customer experience journeys.
Not surprisingly, corporate venture capital (CVC) initiatives by large companies offer much more than cash to promising start-ups, connecting them with their core technologies, systems, products and channels. Following the same rationale, leading accelerator clubs offer management skills and access to investors, digital giants invest in ‘plug & play’ possibilities and VC firms seek different options to consolidate platforms. When cash is just a commodity, smart money means unique connections and preferred access.
In conclusion, as a general rule of thumb, despite the fact that some famous unicorns remained unplugged, I truly believe that Plug beats Cash during the start-up phase, mainly because a platform plug improves management capabilities, fosters innovation through collaboration, leverages operational excellence, accelerates sales and attracts better talents. Cash comes straight afterwards as a natural outcome of these powerful drivers.
Daniel Augusto Motta, PhD, MSc
Founder & CEO BMI Blue Management Institute