Need capital to start or build your business? Ever try to figure out who the best fit VC is for you? In my view, the absolute best way for you to get the capital to build your business is to get your capital from your customers in the form of gross profits.
VC Money is Expensive
VC money is dilutive, meaning that if you take their money, you will own less of your company and you have an investor with rights that reduce your control over your business. The only way for VC money to add value to your business is if you use the money in a way that builds more value in your business than the dilutive effects of the VC money. It is true that the value of your business will be higher when you first take the money, as your business will have both its enterprise value plus the cash that is sitting on the balance sheet, but let’s face it — you will spend the cash building your business and you need to turn the cash into business value that is a lot greater than the cash in order for your VC money to add value to your business!
Customer Money Builds Value in Many Ways
More gross profits from customers is the single best way to build value in your business by investing those gross profits to create more gross profits! (by the way, the simplest way to think about gross profits is that they are the cash that you get from your customers less your out-of-pocket costs for serving those customers.)
In addition to adding value to your business and giving you more money to invest, your focus on gross profits will help you to do many things that will make your business better, including:
Working to find your best customer segment that will give you the best gross profits over time
Collecting a portfolio of customers who are customers willing to allow you to make money off of them and avoid lower value customers who only want to get things for free.
Creating higher gross margins that will give you more gross profits off of each unit of customer revenue. For example, finding where you can change your pricing model, raise prices, or lower your costs to serve customers through things like more automation, a more intuitive product and better in-product help.
In essence, customer money adds value to your business and allows you to avoid dilutive VC investments, and the search for customer money (in the form of gross profits) forces you to create the best economic model for your business while building your business!
Where Do You Want To Spend Your Time?
You can spend your time searching for your next VC round or you can spend your time gathering customer money and building your business. Clearly, VCs can play a major role in getting you the resources and skills necessary to build your business, but the best VCs are your customers!
Scott Maxwell founded OpenView Venture Partners in 2006 and has worked in venture capital for over 11 years. For more insight from Scott, you can visit his blog and follow him on Twitter @scottsnews. Opinions expressed here are entirely his own.