Fast Cash vs. Slow Equity

Knowing what you're building

One mistake I’ve made in entrepreneurship is not understanding the difference between “cash businesses” and “equity businesses.”

A cash business is like an ATM. It spits out money reliably, often immediately, but may have limited long-term value. You might replace your salary quite quickly with a cash business, but it’s often easier to compete with so someone could come eat your lunch, and it might be hard to scale past a certain revenue number.

An equity business is more like planting a tree. It often takes considerably longer to replace your salary, but once you do those earnings are more durable, and the business is often worth quite a bit on its own.

The mistake I’ve made, and that you want to avoid, is expecting cash business payouts from an equity business, and expecting equity business growth from a cash business.

I learned this distinction the hard way with my marketing agency Growth Machine. It was an incredible cash business, I managed to get it to over $1m a year with only five or six employees. But I made the mistake of treating it like an equity play. I tried scaling it aggressively, imagining I might be able to sell it someday. I should have let it be the cash cow it was and used those proceeds to fund something with more long-term potential.

The flip side are businesses that make peanuts initially but compound into something massive. Nathan Barry recently shared that Kit.com barely made $2k per month for their first two years. From a cash flow perspective, that had to be terribly depressing. Nathan could have made multiples of that from a single consulting client. But ten years later and Kit is worth well over $100m, whereas if he had spent that time consulting or freelancing he’d probably still be charging about the same amount.

A cash business can have quick linear growth, whereas an equity business will have slower but exponential growth.

This is part of why the standard advice is to not quit your day job when you start a startup. You need the salary to keep you afloat for the years it will likely take for your equity business to start paying you.

But there’s another option you could also consider. Instead of going all-in on either type, what if you deliberately combined them? Find a cash business that pays the bills (and then some), but only invest enough time to keep it humming. Don’t try to scale it too far past the sustenance level. Then use that cushion to work on an equity business that could really scale, without the pressure of needing immediate returns.

The danger is in misdiagnosing which type of business you're building. I’ve seen this a few times with online courses or “creator businesses” in particular. Someone launches a course that prints money, then tries turning it into a "real business" by hiring a team and scaling up. But they hit a ceiling on what the course can earn despite the increased investment, and they often end up making less than when it was smaller.

I made this mistake again the last few years with my site and writing. I abandoned my cash-generating activities to focus entirely on book writing, not fully respecting how long the runway is before books can replace a decent income. The smarter play would have been maintaining some of that cash flow while building the book business so it didn’t have that immediate pressure to succeed.

I’m trying to rediscover that balance now, and it feels good to flex some of my “business muscles” alongside the writing muscles. I definitely worry about getting too sidetracked by making money (again), but there’s a prudent amount of it will give me the freedom to attack this author career for years where others might have to abandon it.

So maybe this way of thinking can help someone else going after a very long term, low odds business as well. Find a solid cash business first. Get it to a point where it covers your costs plus some cushion. Then be content leaving it at that level while you focus on building something bigger on that 5-10 year timeline.

Otherwise you risk having to abandon your long term ambitions right before they take off.

Other Things

• Husk, my sci-fi novel, is done! I’ll share the cover and more soon, but I’m targeting a late-May publish date

• Nathan and I released a great episode last week on hiring a developmental editor for your book

• With Husk done I’ll be jumping back into Build Your Own Apps next week, planning to add a few more videos to flush out some of the existing sections.

Thank you to Matt Ragland for riffing on some of this idea with my this afternoon.