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First of all, let me preface this by saying I have yet to seek VC or Angel funding and therefore cannot speak from experience in this regard. That said however, I have seen this question posed numerous times while watching the popular investment TV shows Shark Tank and Dragons Den. In these episodes, entrepreneurs and inventors pitch their businesses to a panel of five self made millionaires(think 100 million plus) to try to receive funding for their venture.

Venture Capital

One of the common complaints, and their are numerous, is when entrepreneurs have invested little to none of their own money into the business and seek VCs to put money in. Venture Capitalists do not want to be the ones to take all the risk.

They fail however to realize the importance of opportunity cost and relative risk. For instance, lets say entrepreneur, in this case Mr. E has spent the last 1.5 years building an e-commerce company. During this time, he has taken no salary, but instead re-invested any profits back into the business. Now he comes to the investors looking for $200k to improve and market the site and hire one developer. The kicker, he has put no money into this site of his own, but rather built it with his own skills. Now Mr. V is upset because he is taking the risk of his own money.

Well opportunity cost is the cost of forgoing other options to do what your doing. Mr. E, a high level developer 2 years out of college would command a strong salary in the labor market, lets assume $70k per year. For sake of argument, we can assume he has paid off college debts, but in all likely hood he still has them. Mr. E has risk a base salary of $70k per year for 1.5 years, or $105k total. His bank account shows $10k and quickly shrinking. He has risked greater than 10 times his net worth in his venture or 1000%.

Mr. V on the other hand is worth $100 million buckaroos. In order to give $200k to the fledgling entrepreneur, he would risk almost nothing of his personal wealth, 0.2%. Who is taking the greater risk? Decide for yourselves and be prepared if your investor asks you a bullshit question.

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