Why Entrepreneurs Are Pocketing Millions Before Making A Profit

Why Entrepreneurs Are Pocketing Millions Before Making A Profit

A strange development has occurred in the startup world. Venture capitalists used to invest in startups so that founders could build the business, grow it to profitability, and get for themselves and their investors millions of dollars. Today it seems the cart has been put before the horse. Many venture capitalists are giving startup entrepreneurs millions of dollars before they?ve even proven the viability of their business idea.

A recent article in Inc. magazine explains the emergence of this peculiar phenomenon:

There’s too much money floating around and there are not enough great startups to invest in. So the best startup deals are extremely competitive, and founders are allowed to make brow-raising demands of investors, and the investors sometimes comply.

Apparently, the record surge in profits in businesses from just about every sector has created an excess of cash?cash that professional investors are looking to sink into new ideas. Lately things have been so good that venture capitalists are having trouble finding enough good deals to put money into.

Some of the stories about what new startup executives are doing are quite incredible. That venture capitalists are competing to fund startups rather than the other way around is encouraging. However, the news should be taken as both an opportunity and a warning.

Having adequate capital to develop products, build operations, hire the right people, and promote your brand is always a good thing. Having too much money can be an invitation to waste and frivolity. You want to strike the right balance between paying yourself and your partners the compensation you believe your work deserves and laying out sufficient funds to keep the business going. Lean times are always around the corner. And you never know when your fortunes will be reversed.

Now is a great time to start a business and take advantage of the relative ease with which you will be able to raise money. But you should simultaneously be thinking ahead and setting out plans for more straitened times.