Why startups should spend VC money like they have to pay it 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 US$3,000,000 cash injection. You can blow the money on Xbox consoles, office perks and supporting a burn-rate that would make Emperor Nero’s pyromania look harmless.

That’s a dramatic version of the fantasy. 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 believe in this dangerous concept. It’s almost as though VC funding is viewed as profit, rather than an investment.

I saw a tweet from Chris Sacca the other day that hit the nail on the head.

Chris is preaching something that I think is crucial. 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.

I started thinking about the mindset and the attitude towards spending that Chris is referring to.

Thinking that the funds are yours to do whatever you please with is unhealthy for you, detrimental to your company and dishonest to your backers. They’ve funded your business with the understanding that you’ll use the money to grow your company and enable 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 cafe.

Photo credit: Ian Baldwin

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 to earn and save. And you’d take it hoping that you’d be able to pay it back someday.