How Venture Capital Works

Early stage capital will solve my cash problems.

This idea has been misleading entrepreneurs since the begging of time (well, maybe not that far back). Early stage venture capital is designed to improve the liquidity of your startup business, but it isn’t designed to pay off the debt that you have already piled up. Your debt is your own responsibility and nobody is going to just hand you a check for early stage venture capital to help take care of it. Honestly. Why would anyone possibly want to pay off your debt? Early stage venture capital investment companies are interested in making more money for themselves with the money that they hand you–they’re not interested in paying off your debt!

Own up to it

Your debt is your own, so don’t try to lay it off on someone else. You racked it up, now pay it off and move on. Otherwise, it’s going to linger around and hinder future opportunities. Many entrepreneurs seek an investment for the sole purpose of getting themselves out of debt. It may be a little counter-intuitive for some, but this will actually turn an investor away from your venture. In fact, the worst thing that you can do is attach your debt to the investment–it’s like hanging an anchor off of the boat. It will constantly slow down your growth, eat up your profit, and ultimately bring the ship to a halt.

Create value, not debt

The best way to attract investors is to create value with your business, not debt. Startups that create value are much more likely to land early stage funding that may be a crucial resource needed to fuel the company’s growth toward a positive cash flow situation. VCs often look for companies that are growing and have a solid business plan, but just need startup funds to take the business to the next level.

Startup investors aren’t interested in assuming debt, they are only interested in making money. Funds that go toward paying off debt are funds that can now no longer be used to create other value and earn a profit. It’s like throwing your investment into the trash–successful investors didn’t become successful by doing this. They became successful investors because they know how to make more money with the money that they already have.

So create value, not debt. Do this by executing on your business plan and continually refining it over and over. There’s always room for improvement. Improve your marketing and advertising, customer service, and especially your sales. Execute everything better than your nearest competitor. If you don’t, somebody else will.

Don’t Forget to Bootstrap

Don’t forget to bootstrap–cut every expense that isn’t critical to improving your profit. That means, you probably don’t need that brand new desk that you’ve been eying for months, or that company car that you’ve always dreamed of. You’ve made it this far with what you have, so stick it out a little longer. These sacrifices will keep your debt low all while boosting the value of your company in the eyes of an investor.