Searching for Capital: Mark Cuban Thinks I’m a Moron

Searching for Capital

A broker assesses the small-business lending market.

I was recently reviewing press reports from the Clinton Global Initiative, and I was struck to find an interview with Mark Cuban where he said that any entrepreneur or small-business owner who starts a business with borrowed money is “a moron.” As someone who borrowed money to start a loan brokerage, I guess it’s pretty clear what that makes me — along with thousands of other small-business owners and entrepreneurs I have met over the years.

There are three ways to finance the start of a company: one is by giving away equity, another is by taking on debt, and the third is through personal savings. It is one of the trickiest and most personal decisions an entrepreneur has to make, and the decision can change as a company begins to grow and evolve. Personally, I strongly disagree with Mr. Cuban’s black-and-white assertion, and I fear that he, as an icon of American entrepreneurship, is doing a disservice to hundreds of thousands of entrepreneurs who look up to him. Decisions about how to finance your company can be tough — and filled with lots of gray.

First of all, it bears noting that persuading a bank to lend money to a start-up is no easy proposition — nor should it be. If a bank does choose to make a loan to a start-up with no established business model, you can bet that the bank will demand some form of collateral, frequently involving the owner’s home. Risking your home to start a business — especially given the poor survival rate of start-ups  — is not a decision to be taken lightly. But I would never call people who choose to do what it takes to pursue their dreams morons.

Mr. Cuban and I had an e-mail exchange about this. “If you are profitable and need capital to grow and can easily cover the debt service, sure, go for it,” he wrote. “If the loan is all risk and you don’t yet have consistent cash flow or any cash flow at all, you are crazy.” Mr. Cuban is surely right that taking on debt before cash flow is established is a scary proposition, but it’s also a fact of life for many business owners. If they choose to go for it, they routinely tap credit cards, home-equity lines, Small Business Administration loans, and friends and family. And of course if their businesses fail, as many do, this debt will follow them.

But there are many examples of business owners whose tough choices led to great companies and lots of jobs. In fact, two of Mr. Cuban’s fellow sharks on “Shark Tank” started companies with borrowed money. Barbrara Corcoran started her real estate empire by borrowing $1,000 from a boyfriend, and Daymond John, the fashion mogul, started his business by mortgaging the house that he and his mother owned together.

I asked Mr. Cuban whether entrepreneurs who cannot raise equity should borrow money to pursue their dreams. “No,” he said, “they shouldn’t take the loan. They are better off starting smaller and slower using sweat equity than taking a loan and basically killing their future. The banks don’t care about their dreams; they care about your financial statements.”

One alternative that Mr. Cuban favors is raising equity. The risk with this approach is that it is not always clear that equity investors have the true interests of entrepreneurs at heart, either. And while it is possible to pay off a loan, investors, if you can get them, are likely to stay with you forever. In many cases, they insist on putting your company on a fast-growth treadmill so they can extract big returns, and this strategy often leads to disaster. The options have to be evaluated carefully, and they are rarely black and white.

When I started my company, I was fortunate enough to have investors who were interested in backing me. But rather than part with a significant percentage of my company, I chose to fight it out on my own, keeping control of my company and taking on some debt in the process. I believe in myself and my vision of my company, and I did not want to put myself in the position of having to pursue risky strategies in the hope of pleasing demanding investors. I invested slowly and carefully, but I still needed to incur debt to get to where I am today.

Entrepreneurs wrestle with decisions like these every day, and the issues are never black and white. What are the terms of the debt or the equity? What is the potential upside of the investment opportunity, and what are the risks? Is there another way to do the job with less investment? These are tough questions, and we all need guidance.

I think Mr. Cuban’s comments demonstrate a narrow perspective on what most small-business owners go through. I don’t have data to back this up, but I believe there are millions of successful businesses in America today that were started by entrepreneurs who believed so strongly in what they were doing that they were willing to put their necks on the line and take on some debt before they had cash flow. I also believe there are millions of small-business owners who elected to take the path less traveled and decided to keep control of their companies and not have outside investors constantly looking over their shoulders. Of course, I also know that there have been lots of business owners who took on debt only to see their businesses fail. Those owners were passionate about their dreams, too.

Sometimes I lie awake at night worrying about the debt that I have incurred. But my business is growing, and I look forward, not backward. So far, at least, I don’t think I have been a moron. How about you? Please tell us how you financed your business. How has it worked out? What would you do differently if you could do it over again?

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

Article source: http://boss.blogs.nytimes.com/2013/07/01/mark-cuban-thinks-im-a-moron/?partner=rss&emc=rss