The Bottleneck
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⚙️ Building relationships with financiers

⚙️ Building relationships with financiers

Dell

Rameel Sheikh
March 31, 2024

_{Read Time:}_{7.8 Minutes}

Happy Sunday Operators ⚙️

I wrote this article on a MacBook this weekend. I love my Macbook.

In comparison, Dell computers are bland. Terrible to look at if we're being honest.

Dell also helped Michael Dell to a $90 billion net worth.

Dell was a shooting star in the 90’s. However, there's an often-overlooked chapter in the company's history.

The company (almost) collapsed.

Here's how a young Michael Dell, with the help of his newly hired COO, corrected their financial mismanagement.

Setting the Stage

Dell’s Capital Crisis

It was 1986, and Dell (then called PC's Limited) was a fledgling startup that had already hit $52 million in sales. All within 3 years.

Yet behind the impressive revenue figures, the company was grappling with a harsh reality. Dell had a mere $300,000 in cash on hand. Dell admitted himself that,

That spring I was so busy running my own new company that I had no idea how close to real financial trouble we were.

Michael Dell, Play Nice but Win

All kinds of operational nightmares started to pop up like:

Receivables were piling up
Unpaid Suppliers were clamoring to at the door
A once-supportive bank had frozen Dell's credit line at $600,000 (sum that would cover just six days' worth of sales)

Facing a liquidity crisis, 21-year-old Michael Dell pulled off a coup by recruiting Lee Walker. Lee Walker was a 45-year-old veteran with a record of raising capital and turning companies around.

What happened next was a masterclass by Lee.

From using credit card sales and special deals with suppliers to keep inventory and unpaid bills low, to smart moves that opened up new lines of credit, Michael Dell and Lee Walker used every trick in the book to keep the company's cash flowing.

Ops Tactic: Predicting liquidity issues is key for any operator. You never know when you’ll need cash on hand.

Why this Matters

16% of businesses fail because of cash flow issues

Dell's early '90s financial woes seem like ancient history. Isn't Dell a relic of an era when personal computers were still a novelty and the internet was in its infancy?

Nope. Dell’s hard-won lessons are just as relevant in today's fast-paced, cash-hungry startup landscape.

Especially with the downturn in funding. In 2022, global venture funding fell by 35% year-over-year to $445 billion, the sharpest drop in over a decade.

Companies fail for many reasons.

Data from the U.S. Bureau of Labor Statistics (BLS) shows that approximately 20% of new businesses fail during the first two years of operation, 45% during the first five years, and 65% during the first ten years.

Exploding Topics

Even well-funded startups are not immune. A study by CB Insights revealed that 38% of startup failures are due to running out of cash or failing to raise new capital.

Another study by the Kauffman Foundation found that the average startup has 18 months of runway before it runs out of cash.

You need to figure out how to stretch your cash out, no matter how impressive your top-line growth may be.

Michael Dell gained a wealth of wisdom and a Rolodex full of banking relationships when he hired Lee.

For today's ops leaders, the parallels are clear. The ability to manage capital, build financial resilience, and surround yourself with battle-tested advisors is more critical than ever.

With inflation hitting a 40-year high of 9.1% in June 2022 and the Federal Reserve hiking interest rates at the fastest pace since the 1980s, companies must be prepped for the worst.

The Blueprint

Here’s the 3 ways that Dell pulled themselves out of their financial crisis.

Stretching Limited Capital

When Michael Dell founded PC's Limited in 1983, he had a mere $1,000 in startup capital to his name.

To put that in perspective, his rival Compaq had raised nearly $100 million by the end of that same year.

Faced with such a daunting resource gap, Dell had to get creative in stretching every dollar to the max.

One key tactic was leveraging credit card sales to minimize the time between order and payment.

Dell required customers to pay upfront via credit card. This way, Dell could receive payment as soon as an order shipped rather than waiting 90 days for a paid invoice. This helped keep cash flowing even as the company was rapidly scaling.

Additionally, Dell adopted a built-to-order model. He would only assemble computers after a customer placed an order, which allowed the company to keep its parts inventory lean.

By selling directly to customers and maintaining just enough inventory to fill existing orders, Dell avoided the cash-draining burden of aging, unsold inventory. that plagued competitors like Compaq.

Compaq built inventory in multiple configurations and stocked them in warehouses around the country. The combination of credit card sales, favorable supplier terms, and lean inventory management allowed Dell to achieve an enviable cash conversion cycle.

By collecting payments from customers long before it had to pay its suppliers, Dell could finance his own growth.

This was no small feat in the capital-intensive world of hardware manufacturing, where companies usually had to front huge sums to build inventory and then wait months to recoup that money through sales.

Firing the CFO

Despite Dell's operational savvy, the company's early success in managing its cash conversion cycle could only take it so far.

When Lee Walker joined PC's Limited as president in 1986, the company had made $52 million in sales for the fiscal year but had just $300,000 in cash on hand. Almost all the revenue went straight back out into salaries and parts.

The situation was dire, and it didn't help that Texas was amidst a severe recession.

Walker's first move was to oust Dell's existing CFO to take over management of the company's finances.

Dell's legal advisor, Kelley Guest, was adamant that the CFO and chief accounting officer, a married couple, were the root of many problems beyond just their unwillingness to raise additional working capital. Per Guest,

The fact that they’re married to each other is just the beginning of the problems with them.

Kelly Guest

Although Dell didn't explicitly call out any wrongdoing, it was clear that the couple was up to some shenanigans with the business. When Walker told them to leave, they asked for $50,000 to not 'hit the destruct button on this business.'

As CFO and chief accountant, they had many ways to make PC's Limited go away. The problem was that the company needed to have $50,000 lying around to pay them off. Walker, unfazed, managed to get them to leave without the payoff.

Securing New Credit Lines

With the CFO gone, Walker turned his attention to securing much-needed credit lines. PC's Limited's existing bank, MBank, had decided to freeze the company's credit line at $600,000. Lee recalled,

I remembered Jim Seymour had told me that Michael’s sales were about a hundred thousand dollars a day. That meant MBank was financing only about six days of sales. My rule of thumb gleaned from hard years of experience was that you need funding for at least twenty-four days of sales. Six days, six hundred thousand dollars was impossible.

Lee Walker, Play Nice and Win

To make matters worse, MBank itself was on the verge of collapse.

Walker leveraged his sterling reputation and relationships to convince Texas Commerce Bank to extend a new credit line, even as MBank was preparing to pull the plug.

This was no small feat, as MBank itself was on the verge of collapse. Walker had recently helped a failed computer company named Balcones through Chapter 11, ensuring that the company's financial backer, Texas Commerce Bank, got back every penny of the $1.5 million it had lent the startup.

Texas Commerce Bank's president, Frank Phillips, was so impressed and grateful to Walker — and taken with the fact that Walker had thrown in his lot with Dell — that he immediately extended PC's Limited a new line of credit.