Venture Capitalists Paying Off Entrepreneurs

I came across an article/podcast on VentureBeat.com called Third-rate VCs are paying off entrepreneurs. Of course it grabbed my attention so I read on.

Ron Conway was talking about how a new trend in the venture capital business for certain VCs to pay entrepreneurs cash up front to go with them. His opinion is that it is a bad idea and all the available cash should be put into the business to increase its chances of success. He used the word “bribe” to describe the practice.

I totally disagree … I think it is a good idea as long as the cash comes out after some proof of sweat equity and commitment is demonstrated.

The cash will help the founders to focus on their business without worrying about putting food in family’s mouths. The other caveat is the amount of cash should be moderate — you don’t need $1M to feel secure -just enough to pay the bills for the duration.

Real entrepreneurs will not get complacent with the cash – they will have more mental energy to focus on the business. I think the reduction in capital to hire people would be offset by the founders increased focus.

It would be interesting to compare the success rates of businesses that receive an early cash out vs the ones that make the founders feel excessive financial pain.

Time will tell
-M