Sometimes a single phrase will pop into my head and illuminate a murky idea for me. This happened a few days ago. The phrase was “ancient rivers of money” and suddenly it helped me understand the idea of inertia as it applies to business in a deeper way. Inertia in business comes from predictable cash flows. That’s not a particularly original thought, but you get to new insights once you start thinking about the age of a cash flow.
We think of cash-flow as a very present-moment kind of idea. It is money going in and out right now. But actually, major cash flow patterns are the oldest part of any business. It is the very stability of the cash flow that allows a business to form around it. In fact, most cash flows are older than the businesses that grow around them. They emerge from older cash flows. When you buy a sandwich at Subway, the few dollars that change hands are part of a very ancient river of money indeed. Through countless small and large course changes, the same river of money that once allowed some ancient Egyptian to buy some bread from his neighbor now allows you to buy a sandwich.
Buyers and sellers alike see markets as an illegible and turbulent churn of transaction opportunities. But really, they are landscapes carved out by great, ancient rivers of money and their tributaries. These rivers change course rarely. Cash flows are also among the most basic financial ideas. Only businesses make profits, but governments and non-profits form around cash flows too.
These ancient rivers carve out both a spatial and temporal landscape. Spatially, the flow metaphor suggests old, dried-up river beds, gorges and ravines, flood plains, ox-bow lakes, watersheds, and of course, the rivers themselves. This plays well with the idea of “segment.”
But markets also have a temporal dimension, based on which river of money you are talking about, and how long ago it last changed course.
If you think of markets that way, things look very different. Some rivers of money are very old and very stable. You can at most fight to displace others from prime positions along the banks. Others are new and unstable and may change course frequently, creating and destroying fortunes through their vagaries. Others may be maturing, with dams being built to stabilize them. People have always bought food and clothes. They are only now beginning to buy iPads. They are starting to not buy CDs.
Generalizing, you can even think of an average “age” of the market as a whole. An interesting question to ask is whether early adopters as a group should be considered as living in a future market, or whether the mainstream should be thought of as living in the past. I prefer the latter model.
Organizations are like riverbank communities. They are as old as the last significant course change or waterfront battle. The stability of the river, not the attitudes of people, is what makes old organizations seem set in their ways. Perhaps people resist new ideas not because they have specific personalities, but because they have settled on the banks of a river of money of a certain age. Or perhaps there is self-selection. Possibly the hidebound kinds go settle on the banks of the most ancient rivers. Tax rivers are among the oldest and most stable rivers of money (and the only ones protected by the threat of legitimate force), and people attracted to government work aren’t exactly known for being passionate champions of creative destruction.
Some startups are about finding and colonizing the banks of minor unknown tributaries of old rivers. Others are about creating new rivers. Still others are about building canals between vigorous new rivers and somnolent old ones. And of course, there are those that are about displacing incumbents from prime waterfront locations.
The nice thing about thinking this way is that the market is now a system of cash flows that exists independently of the specific set of businesses serving it in a given era. You can map the system and look for an unoccupied waterfront spot.
I would like to create a visualization of the oldest and most stable rivers of money, around things like food, clothing, taxes and shelter. I don’t know how to do that yet.
I first mentioned the metaphor of money as a system of flows (with things like glaciers mapping to frozen assets) in my old post, Fools and their Money Metaphors, and this particular one stuck in my head. Then in a comment to my Eight Metaphors of Organization post, a reader used the phrase “high inertia cash flow.”
When I first read that comment, an image popped into my head unbidden: a dark subterranean cavern with a river flowing through, with goblin-like creatures swarming around it, holding torches. Like Gringott’s bank in the Harry Potter movies. “Ancient” is how I would describe the feel of that image.
I’d like a t-shirt with a skull-and-crossbones below graphic and the line “Don’t touch my cash flows!” below it. The attitude pretty much defines anybody who is effective in the world of business. When you meet a tough, no-bullshit businessperson, no matter what function they come from, chances are, they see their job as protecting a cash flow.
About Venkatesh Rao
Very poignant metaphor Venkat… wow, that was a great reader. I’m running this one over in my head a few times, and it’s already carved out its own space.
Great metaphor. Really good. Cheers for this, I’m feeling more in touch with commerce. I’ll meditate on this more. A very very good post.
An interesting concept. And with the flow of money now moving into places like China, India and Brazil, are they new rivers, new tributaries or a flood that’s expanding and redefining old riverbanks?
Access to money has been (and is) expanding. 5,000 years ago economies weren’t counted in the trillions of dollars (though maybe it’s all just proportional). I think I read in Gladwell’s, Outliers, where he measured (or cited someone else’s research) economies in terms of products. Product availability, variability, quantities, etc., as a measure of progress and economic health. Part of humanity’s success is increasing product inventory of goods from a few stone and wood implements to the modern technology and commerce we have today (and helping to increase standards of living, overall, around the globe).
My suspicion is that money flows are semi-sentient, like a collective swarm or hive mind, in that the right product introduction attracts a migration of money, diverting it (and expanding the overall money pool if successful), rather than a passive flow to be contained and managed in a system.
The increasing product inventory effect is an interesting thing to consider. I don’t know enough about hyrdology to know if similar things happen to rivers as they age.
I do like the idea of cash flows being sentient. Reminds me of the idea of ‘dust’ in Pullman’s “Dark Materials” trilogy or the midichlorians in Star Wars (the microorganisms that form the Force).
Venkat
This metaphor is really infectious for me I really enjoyed plugging my life / business in to it, like Sebastian I assume I’ll carry this one with me for a while. Incidentally, I’m about halfway through this book:
http://www.amazon.com/Ascent-Money-Financial-History-World/dp/1594201927
….and I believe blog readers would are likely to enjoy it if they liked this post.
Yes, that’s pretty good. The TV series is very good as well.
Posts like this are why your RSS feed is at the top of my homepage.
A few river ideas that might drive further thought:
Rivers provide fresh water, which we use to drink, irrigate crops, and sustain livestock. But we also use rivers for transportation both downstream and up.
When rivers flood, they deposit sediment on the land around them building up natural levees. If you don’t want a river to flood, you build your own levees. But there’s a catch. As the water flows downriver some of the sediment it carries is deposited on the riverbed. Over time this will accumulate such that the gradient will flatten and the river will slow down. The more the river slows the faster it deposits sediment. Rivers will not flow uphill. So to solve the problem that man-made levees create you have to dredge the river. Then the dredging leads to coastal erosion…
Rivers always take the shortest path to an outlet. Sometimes this means they split, sending flows through different channels. If an older flow is a longer path, the shorter path will over time get an increasing share of the flow over time. The people downriver on the old path will often want to build a dam near the fork to throttle the river and protect their flow, but not everybody downriver is equally concerned.
If you primarily use the river for transportation, then the change of flow won’t much matter because sea water (salt water) will usually backup keeping the old river path filled and viable as a shipping channel. But if the river was the main source of fresh water then the number of people, crops, and livestock that can be supported will dramatically decrease.
Oh I like this one.
One of my favorite theories, is that people make up the ‘cells’ in society, just as we are made up of cells ourselves.
I like to wonder: could the cells in my body be aware that they are a part of of my larger self? Does that idea even make sense? That’s pretty much the definition of ‘transcendent.’
Likewise I wonder what I should be looking for, to clue me in to the fact that I am just a part of a larger whole.
Looking at the world in this light, I think money is actually a communications tool. It’s analogous to a sort of neurotransmitter in the brain.
One thing to add here: financiers often talk about “pools” of money as well. This fits in neatly with your metaphor, because it implies a somewhat stagnant source of money from which small trickles and, eventually, torrents might flow. This is not the instantaneous, magical money of tech startups and angel investors; it is the old kind of money of the Rothschilds and Rockefellers and of long standing sources that took generations to accumulated and which is highly protected in low-risk financial fortifications.
I think of pools as a kind of old, slow-moving money. It’s frozen, in some sense, tied up in unfast mediums such as real estate, bonds, retirement accounts. But the financial industry has tried to make all of this slow, pooling money flow faster, and have figured out ways to drain these pools–without always replenishing them. Thus real estate was made into a quick transaction, collateralized industry in the early 2000s, as were retirement accounts and everything else.
Nothing new under the Sun. An older and arguably more accurate metaphor is the trough. As in “pigs feeding at the through”.
I suppose you can formulate this as an example of contructal theory.