In Forget VC Money, Fund Yourself, Jerry Colonna describes an exchange he had with a young entrepreneur at a conference where he was speaking:
“So, even though I’m cash-flow positive, I can’t even get a meeting with a VC. Why is that?”I blew out the air from my lungs and surprised him with my response. “Why do you want to sell half of your profitable business?”
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I went on. “Look…this is your first business, right?” I turned to the audience, most of whom were in their mid-forties and fifties, “How many of you have run businesses before?” A few hands shot up. I zeroed in one guy, your typical gray-haired exec. He told us his first business — his current business — was manufacturing specialty airplane engine parts. He’d launched the business in the late 1970s after he’d left Grumman. “And how did you raise the capital to get going?”He smiled; he’d just finished paying off the second mortgage he’d taken out to get going, he said.
I looked at the parts manufacturer, pointed to my young questioner still standing in the dark room, and said, “And what would you have done if your business had low-initial capital requirements and was cash-flow positive from the get-go?”
He, and a bunch of his peers, burst out laughing. My young entrepreneur was still puzzled.
I tried to explain. “The best possible way to finance your business is from free cash flow. If you can meet your capital needs without selling equity or without taking on personal debt, do it. It’s that simple.” Moreover, I continued, if growth continued the way it had — he’d done more than $3 million in revenue and $1 million in EBITDA in his first 18 months — than he’d have a very valuable business; something he should want to own as much of as possible.