By Fred Wilson for AVC Blog
I am reminded time and time again that things that sound too good to be true almost always are. There really is no free lunch, in business or in life.
Here are a few examples of things that seem so tantalizing to entrepreneurs and the companies they create but turn out to be just as costly (or more) than the alternative:
- Taking on debt instead of equity in the hope that it will be paid off in the future with equity sold at much higher prices. Or convertible debt that converts in the future at a much higher price, which is basically the same thing. I have seen this go badly so many times that I now almost throw tantrums when our portfolio companies choose to do this.
- Raising another round to buy more time to figure out the business model vs figuring out the business model now. “Buying time” is one of the greatest free lunch fallacies of all time. I strongly believe that now is almost always a better time than later to do something.
- Hiring a service provider (lawyer, accountant, PR firm, etc) who will do your work for free in return for your company’s business later. This sounds great but unfortunately locks you in to using this firm later on when others may be a better choice for your company.
- A big enterprise company will pay you to modify your software to work “better” for them. Sounds great now, when you need the revenues/cash so badly, but little did you realize that you just outsourced your roadmap to a big company.
I could go on and on, but hopefully I’ve made my point. I encourage everyone to make the hard and painful choices when they have to be made and avoid the free lunch fallacy. It mostly leads to indigestion.