So I was brainstorming with a couple potential business partners for a very hot idea we’re looking to launch. They asked about taking in investors. They seemed genuinely shocked when I said I didn’t want any.
Why would I?
I know the trendy thing today is creating a pitch that attracts Venture Capital firms. But as a rule, I don’t usually want them. Their job is to find investments they can grow and cash out. And that sometimes clashes with the best long-term objectives for a business.
Read INC, Entrepreneur or Fast Company magazines and everyone is proud of how many rounds of financing they’ve scored and how much money they’ve raised. They honestly don’t seem to know the difference between raising money and actually earning money. One is an obligation that needs to be repaid. The other is a profit you keep, created by providing value.
Borrowing money is very seldom the path to prosperity. I do believe in leverage and definitely recommend it. (Real estate for example.) However, if a venture capitalist wants to invest in your business, they need to leverage their money, which often means to grow the business and cash it out. I would prefer a partner – someone who buys into the objectives of the business, and is bringing expertise that can help grow it.
I have a friend with as much credit card debt as he earns in a year. He thinks the answer to his problems is a consolidation loan. But he hasn’t looked at the core problem, which of course, is he spends more than he makes.
It seems simplistic, but it really is that simple. And a lot of entrepreneurs and companies have a similar mentality. They look for loans or investors to cover up sloppy money management. Most companies (and people) would be much better off if they lived within their cash flow and grew their business from that.
There is a time and place for credit and also one for investors. But neither is designed to subsidize bad business models. Use credit when you can leverage it for more profit.
As far as taking in investors, it all depends on what outcome you are looking for. If you’re looking to start a business and flip it for a profit – VC investors may be a good fit for you.
I’m more interested in “autoship” businesses, where customers have a standing order with a credit card on file which you charge every month until they quit. And once you have one like that – it’s crazy to sell it. So instead of a VC investor who wants quick profits, you’re better to have a partner committed to the business. (So if I were on Shark Tank, I'd probably jump at the chance to work with Mark Cuban, Daymond John, Barbara Corcoran, Lori Greiner or Robert Herjavec, but would probably pass up any cash from Mr. Wonderful.)
So whatever your objectives are – be mindful of them. And approach credit and investors with discernment.