Venture Capital is a Mortgage

After reading this post on founder dilution, I realized that my feelings on venture capital have changed since the financial crisis.

When we all lived in a world of exciting growth, rising house prices, and record profits, it was easier to be dazzled by the magic of Other People's Money. Borrowing and lending huge amounts seemed a great long-term financial strategy that prepared you for next year's record growth.

But now the buzz has worn off-- people are losing their homes and jobs with gut-wrenching speed. Oh, and that expected growth for next year? It's gone for an extended vacation.

Lending and overleveraging got us into a tough financial mess. And this got me seeing venture capital in the same light that I see home mortgages-- a good way to spend beyond your means and lose your hard work. Let's try some analogies...

Working for someone else is like renting an apartment.

Employees and renters have a lot of similarities. In both, you're more of a participant than a driver. Someone else makes the house rules, the arrangement can end when either party is unhappy, you're investing your time in someone else's bottom line (not yours!), and, fundamentally, most problems are someone else's responsibility. In the end, you're dependent on your employer and your landlord for vital aspects of your life.

Owning your business is like owning your home.

Here's where all the value, independence, and responsibility comes in. When you own your home or business, you make the rules, you're investing your time on your own value, and ultimately it's all your responsibility. You're a lot more independent of other people, but you're often closely tied to your investment.

In the ideal case, you own the majority of your house or business, and both are more than paying for themselves.

So people like to speed up that process...

Using VC money is like getting a home mortgage

You can't afford your dream business or house, so you get money with an agreement that eventually you will make good.

Involving lenders and VCs substantially increases the chance of affording the business/house, but their participation also significantly decreases the money and value you'd keep versus doing it all yourself. Their financial involvement could easily continue for decades, if you don't fail before that.

While borrowing and investment sounds like you're better off than renting/employment (in terms of personal value growth), you're actually inheriting many of the same limitations and chaining yourself to your benefactors for the long haul.

Why spend so wildly beyond your means?

Home buyers had a rude awakening-- now they're buying homes they can actually afford or foregoing the purchase entirely. Now they have to provide larger down payments because the lending system isn't as free as it was. Buying expensive homes on someone else's dime is harder now, so home owners are forced to avoid extensive leveraging of their future.

But who's going to teach entrepreneurs? VCs are still making deals and still growing companies who feel they need tons of money to get going.

While it's exciting to live beyond your means, your company doesn't have to do so. A company that can't grow itself without crazy amounts of outside money isn't going to be able to manage downturns and turbulence very well anyway. (Remember 2000?)

Even if you succeed, is it ultimately worth 80% of your hard work to grow your business faster? Borrowing money to bridge financial sticky points is one thing, but living beyond your means is a good way to over-leverage your future and drain your equity. Don't let yourself believe that the only way to success is with ridiculous infusions of investor cash.

Blessed be startups that drive their own growth without spending beyond their means.

Work hard, bootstrap, keep your head up, raise money modestly (if at all), and you can succeed without selling as much of your soul.