Central Perk: Seth's Blog : Before you raise money (assets and expenses)

vineri, 22 iunie 2012

Seth's Blog : Before you raise money (assets and expenses)

Before you raise money (assets and expenses)

There are more ways to raise money for your business, project or organization than ever before. There are more angel investors, more online sites, more VCs... it's true that the local bank has largely abandoned this responsibility, but the web keeps reminding us of the opportunities.

Here's the key thing you have to understand before you ask your mom or your friends or the local VC for an investment:

There's a huge difference between spending money on expenses and spending money to build an asset.

Ice at a picnic is an expense. Once it melts, it's gone. Your electric bill, rent--these are costs of doing business, and you should rarely if ever borrow money to pay them.

Assets, on the other hand, are things that sustain or grow in value, that you can use again and again, and that are ultimately worth more than they cost.

A college degree from the right institution is an asset. So is an earned list of 10,000 people who want to hear from you by email once a week. So is a reputation (which some people call a brand).

For entrepreneurs, then, the math is simple: any asset-building opportunity that will generate a long-term profit is worth considering and even worth borrowing money to acquire.

But if your business needs to borrow money to simply pay your expenses, to keep you at a steady state, you're doomed. Unless those expenses are demonstrably building a bigger asset for tomorrow, you're going to regret the investment, because it's not an investment, it's just a waste.

The second thing to keep in mind is this: you probably have to pay the money back. Don't borrow money to pay for an asset unless you can see a clear path to paying it back. That might mean selling the asset later (which is what VCs almost always do) or it might mean building a project where the asset is so profitable you can pay people back directly (which is why it's worth borrowing money to go to Harvard Medical School).

If you sell a percentage of your company (which is what most investors ask for) then you've basically started down the path to sell the whole thing in order for the investors to get repaid. Nothing wrong with that, just be sure you're going in with your eyes open.

When in doubt, raise money from your customers by selling them something they truly need--your product.