In an internet-led world, every business has to deal with more competition. Competitors are now neighbors — their stalls are situated side-by-side in The Great Digital Bazaar. Search for any product on Google or Amazon and you’ll see a group of competitors, squeezed together, vying desperately for your attention.
Assuming businesses in a market all distribute it through the same grand channel — the internet — how can any one company in a market succeed?
Brand and trust, yes. Great product, yes. Novel distribution, yes. Growth loops, okay Andrew Chen. All of these are requisite. Yet, preventing all of these things from happening is your cash position. It costs dollars to create value to generate dollars.
In order to build product, then reach customers, requires capital. In order to be a winner in any sizable market requires a lot of capital. Even if you’re not trying to build a unicorn, all internet-based startups must pay taxes to the product lord, Chief Amazon and the distribution lords, Sir Facebook and Madam Google.
Cash is necessary. In fact, cash position is the seed of any competitive advantage. If a company has more dollars to spend on creating a better product and can afford to distribute it more widely, they are more likely to win.
So where does cash come from?
1. Generate cash (the ol fashioned way) and use profit dollars to fuel growth
2. SBA loans and grants, which are slow and painful
3. Traditional loans, invoice financings, or cash advances, but require an existing stream of revenue or other collateral
4. Crowdfunding
5. Venture funding
If you are generating predictable revenues, then merchant cash advance schemes are not a bad idea. But recall that cash is a competitive advantage. Simply, the more the better. If you have real competitors who are also generating revenue and competing for the same customers, the situation quickly falls to the level of each party’s incentives.
You don’t want to dilute your equity, but in order to get ahead, your competitors will. If you don’t take on venture funding and your competitor does, they now have more cash. They have a higher probability of winning and you’re forced to fight an uphill battle. So as much as you don’t want to dilute your equity, you need more for your company to survive and to win. Trading off equity for venture dollars becomes inevitable.
For this reason, venture capital can never die in the age of the internet. There will be no silver bullet that allows founders to hold onto their equity. Equity will always be traded off because it is another card founders can play to advance their cash position, really a strategic advantage.
Venture debt, cash advances, and other models are great. Not because they remove venture capital from the equation, but that they introduce additional opportunities for companies to gain cash-position advantages.