Mark Cuban: The Best Equity is Sweat Equity

Posted on January 4, 2008
Filed Under Web 2.0 Kool Aid |

Billionaire Mark Cuban is one of my favorite bloggers. I don’t always agree with him, but I like his style and you can’t help but admire how he built up, sold it to Yahoo! for $5.7 billion in stock and then made some smart financial moves that protected his wealth when the market crashed.

In light of the erudite advice given by Mahalo CEO Jason Calacanis and venture capitalist Fred Wilson , I thought it would be worthwhile to share Mark Cuban’s January 2 post, “The Best Equity is Sweat Equity,” so that readers can compare the wisdom offered by Calacanis and Wilson to the wisdom offered by Cuban.

The important points Cuban makes in his post:

The best businesses in recent entrepreneurial history are those that have been started with little or no money. Dell Computer, MicroSoft, Apple, HP and tens of thousands of others started in dorm rooms, tiny offices or garages. There weren’t 100 page long business plans. In all of my businesses, I started by putting together spreadsheets of my expenses, which allowed me to calculate how much revenue I needed to break even and keep the lights on in my office and my apartment. I wrote overviews of what I was selling, why I thought the business made sense, an overview of my competition and why my product and/or service would be important to my customers, and why they should buy or use it. All of it on a piece of yellow paper or in a word processing file, and none of it cost me more than the diet soda I was drinking while I was writing it up.

From there, I took the most important steps: I tried to find people to shoot holes in it…Each step cost me next to nothing to get great feedback. Each enabled me to check the foundation of my business idea to see if it was easy to shoot holes in it, and most importantly, they all served as sales calls. Each company eventually became a customer of ours.

At this point, many entrepreneurs think the next step is to take all this feedback, update their 100 page business plans and go out and raise money. It’s as if the missing link for success in a business is cash to get started. It’s not. Far more often than not, raising cash is the biggest mistake you can make. [Emphasis mine]

Most entrepreneurs tend to think in terms of what raising money means to them. How it can get them started? How many people they can hire? How much they can spend on office space? How much they can pay themselves? They forget to put themselves in the position of the person or company they are asking for money from. They think they are considering that person’s position by making up numbers and calling them expected returns for the investor. If you only give me X dollars, you will get X pct back in X years. You will double or triple your money in X years. Any investor worth anything knows you are just making these numbers up. They are meaningless. Worse, if you tell a savvy investor that the market is X billions of dollars and you just need one or some low percent to make zillions, you are immediately kicked to the curb.

Investors don’t care about your dreams and goals. They love that you have them. They love that they motivate you. Investors care about how they are going to get their money back and then some. Family cares about your dreams. Investors care about money. There is a reason why venture capitalists are often referred to as Vulture Capitalists.

There are only two reasonable sources of capital for startup entrepreneurs, your own pocket and your customers pockets.

You shouldn’t have to take money from anyone. Businesses don’t have to start big. The best ones start small enough to suit the circumstances of their founders. I started MicroSolutions by getting an advance from my first customer of $500. The business didn’t grow quickly in the first couple years. We didn’t grow past 4 people in the first couple years, and we all worked dirt cheap.

So what’s wrong with that? It’s OK to start slow. It’s ok to grow slow. As much as you want to think that all things would change if you only had more cash available, they probably won’t.

The reality is that for most businesses, they don’t need more cash, they need more brains.

In short, according to Cuban, startup companies should:

Quite different from the advice given by Calacanis. Perhaps there’s a good reason why Cuban is sitting on over $2.5 billion while Calacanis probably has at most 1% of the wealth Cuban does, has taken over $16 million from “vulture” capitalists to fund his latest startup and is still stuck in the small world of Silicon Valley. And it isn’t all luck.

I find it ironic that , Calacanis talks about playing in the “big leagues.” Clearly, when it comes to this discussion, Calacanis is playing in the minor leagues. Mark Cuban is playing in the big leagues. After all, he does own an NBA team.

Share and Enjoy: These icons link to social bookmarking sites where readers can share and discover new web pages.
  • Digg
  • Netvouz
  • ThisNext
  • Reddit
  • SphereIt
  • Slashdot
  • StumbleUpon
  • Technorati
Print This Post Print This Post


One Response to “Mark Cuban: The Best Equity is Sweat Equity”

  1. The Top Mistakes Entrepreneurs Make : The Drama 2.0 Show on January 9th, 2008 3:33 pm

    […] the game the VCs play are different from the dynamics of the game entrepreneurs play. As Mark Cuban has pointed out, taking on outside investment changes your entire situation considerably, mostly for the worse, and […]

Leave a Reply