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Why VC Money Should Not Be Considered As A ‘Free Gift’

Why VC Money Should Not Be Considered As A ‘Free Gift’

An Entrepreneur Should Take The VC Money As A Loan That He Will Have To Pay Back

Do you want some free money? That would be great. All you need is a venture capitalist or an angel investor to swoop down and make you rich with a $3,000,000 cash injection. You can blow the money on X-box consoles, office perks and supporting a burn-rate that would make Emperor Nero’s pyromania look harmless.

That’s a fantasy, and it’s a dramatic version.

But I don’t know if it’s too far off the way many would-be founders think about venture capital. I’ve spoken to a lot of entrepreneurs and worked with some of them, who have a dangerous concept. It’s almost as though VC funding is viewed as profit, rather than investment.

When you take investment for your business, you shouldn’t consider it to be free money. You shouldn’t think of it as a gift. Investors aren’t the national lottery, and you didn’t win it anyway. Thinking that the funds are yours to do whatever you please with is unhealthy for you, poisonous for your company and dishonest to your backers. They’ve funded your business with the understanding that you’ll take that money and use it to support growth, enabling them to receive a return on their investment.

They haven’t funded you because Mama needs a new air hockey table.

Imagine, for a moment, that you were going to do something that’s not sexy and start a small business. A shop on the corner, a lawn mowing service. Or my favourite example, a sandwich shop/cafe. The first step wouldn’t be seeking investment. If there was money required, the first step would be an old-school, interest accruing, unforgiving bank loan or money from your closest family members.

In the first case, you would sign a contract, and commit yourself to paying back a loan of several thousand dollars, whether your business sinks or swims. In the second, you’d take money from people who worked hard their whole lives and earned and saved. And you’d take it hoping that you’d be able to pay it back, someday. Those are tough propositions, but they’re normal. This is what people who run small businesses generally have to do. And for a lot of people, it succeeds. They work their ass off, manage their funds responsibly and pay down their debt. It’s a matter of spending cash where it’s most necessary, managing cash-flow and maintaining a certain level of frugality. Because the small business entrepreneur, with a loan from Big Bad Bank or her Mum’s retirement fund understands that sooner or later, she’s going to need to pay every cent back, with interest.

If you’re a startup founder, and you do have funding for your business, you should treat that cash the same way. Treat it like a loan that you have to pay back. Spend it like every cent is going to cost you twice. You’ll be better able to prioritise your expenses. You might even cut down on your burn-rate and extend the life of your start-up.

But You Have To Spend Money To Make Money!

Absolutely. But you don’t need to spend it like a drunk sailor on shore-leave. If you want your business to run lean and mean, spending sensibly is the right way to go. The lower your overheads, the lower your capital spend, the healthier your business is going to be.

My Investors Won’t Ask For Their Money Back. So Why Act Like They Will?

Because at the end of the day, if you succeed and become profitable, you’ll have cash in the bank. If you fail and run out of cash, it won’t happen overnight, you can sustain yourself for longer. Plus, you’ll earn the respect of your investors if you can demonstrate that you used their capital with some degree of mindfulness.

How Can I Hire The Best Talent Without Burning Cash?

Do you really want to hire a genius level developer if it means bankrupting your business? Or would you rather hire a talented, hard-working developer who has the skills you need and the drive to learn more, who is joining your company because they genuinely want to work there? Hint: there’s only one right answer. The other solution is to look to the future of work. Look at where the needle is going, not where it’s been. With our platform, Speedlancer, we’re anticipating a more flexible approach to using freelancers and talented coders, marketers and designers, and we’ve made some of the world’s best instantly available to companies the whole world over.

[This post by Jon Westenberg first appeared on Medium and has been reproduced with permission.]  

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Note: The views and opinions expressed are solely those of the author and does not necessarily reflect the views held by Inc42, its creators or employees. Inc42 is not responsible for the accuracy of any of the information supplied by guest bloggers.