I was having lunch the other day with a dear friend who also happens to be a business owner.

I’m not sure if he’d appreciate me using his name, but I can tell you that he owns businesses throughout the country, about two dozen in all. I would guess that each of these businesses produces annual revenues in excess of $5 million.

We probably don’t get together as often as we should, but when we do it typically doesn’t take long for us to begin comparing notes; particularly vis-à-vis how we run our businesses.

At some point during our meal, a young man came up to me and extended his hand. I said to my friend (for sake of ease, I’ll just call him “Joe”), “Joe, I’d like you to meet (I’ll call the other guy “Charlie”) Charlie. Charlie is a young entrepreneur.”

At that point, Charlie began telling us about his newest start-up. Their offices happened to be right across the street from the restaurant, and it didn’t take him but a minute to launch into a monologue about the “venture dollars” they were in process of raising.

In point of fact, probably 80 or 90% of his monologue focused on how well they were doing re: raising those venture dollars.

After he walked away, Joe and I looked at each other for a long second. Then, we both, and simultaneously, shook our heads.

Joe went first, “Venture money,” he muttered, “Angel investors,” he practically bit off the phrase. “I am sick to death with the fact that every other business owner I meet these days is selling off his or her equity in order to start or sustain their business.”

He continued, “And ‘burn rate.’ What the hell is this ‘burn rate’ thing, anyway? I never even heard this term until about a year ago when some guy was telling me about his ‘burn rate.’ When I asked him what exactly is a ‘burn rate,’ he looked at me like I had two heads. Then, he explained that this was the amount of money --- equity money, mind you --- that he was ‘burning’ each month.”

I sat back in my chair and smiled. My friend “Joe” has never spent much time in the high-tech world, where this phrase and the attendant penchant for selling off equity in return for survival cash is practically de rigueur.

Joe went on to say that when he started his first business (his only business, by the way) he grew it through sales. He held onto 100% of his equity and the only borrowing he did was to establish a line of credit. That LOC was strictly to cover cash flow problems.

I told him that my personal “claim to fame” was that I, too, have never once sold off equity to start a business. I am actually very proud of this. I’ve always been able to grow my companies by providing value to my customers and then charging reasonable prices and making reasonable profits from that value.

I used to lecture at Carnegie Mellon’s Don Jones Center for Entrepreneurial Studies. Since they changed management, I have not been invited back. (It was probably something I said.)

That’s unfortunate. And I say this because, and based on what I heard when I was lecturing there, as well as what I now hear from people taking classes there, is that there’s almost no advocacy for “entrepreneurship by selling”.

I remember distinctly the night that I was scheduled to lecture right after the managing director or CEO (I can’t remember his title) of a local venture fund. I sat in the back of the room and listened to this guy tell the students that it was absolutely imperative that they first write a great business plan and that they then take that business plan to various angel and venture investors for their start-up funding.

The guy wasn’t even out of the room when I stood up at the same (warm) podium and blurted out, “Forget everything that guy just told you --- I’m now going to tell you how you can hang on to your equity and yet still build one hell of a business.”

After which I (hopefully) regaled them with stories of contract programming and other consulting-related businesses where I, “bought nothing until I had already sold it.” (And thank you, Sunil Wadhwani for teaching me that very valuable lesson.)

And this is exactly what we did. We would start a business that provided niche-oriented expertise, employing strictly 1099-type contractors, to relevant customers. We would find out exactly what they needed, then we would collect an up-front fee for bringing that niche-oriented talent in (always staying two weeks ahead on our cash flow).

It really wasn’t that hard to do.

And once we got to a couple dozen programmers or consultants, we (so long as we kept our margins at 35% or more) had a nice, fat pool of some $75,000.00 a month to “invest” in our start-up.

Cost me nothing.

The problem is this. We are teaching our young people that equity funding is the only way to go! I know this is true because I hear it all the time.

And it’s so, so, wrong.

It often makes me wonder. How did businesses get started before the age of investment capital? I’m serious. I talk to guys like Regis McKenna all the time. Regis and others like him are quick to tell me that, and prior to roughly 1950 or 1960, there were almost zero places willing to provide equity funding.

In reality, you had two choices: You could borrow the (fully-collateralized) money from a bank or some other lending institution; or, you could do what we did --- find one of those “sell first/buy later” products or services and use the net margins as your private investment vehicle.

Even scarier is the fact that I can sniff a little bit of the dot com mania coming back around again. More and more frequently, I am hearing and reading about deals wherein either eyeballs or persons are up-front aggregated, thus enticing investors to front-load their money on the promise of future, multiplied wealth.

(I remember going to a seminar at the Convention Center --- this was back in roughly 1998 --- I’m sure the model was AOL. The hotshot presenting that day had only a revenue line on his spreadsheet. The expense line was irrelevant.)

Look, building a business is tough. People who do it are tough people. People who succeed at it are even tougher. It’s truly a very easy thing to fail at.

But tough people come from tough situations. I am at my best when my back is up against the wall, when I’m painted into a corner. When I’m desperate.

For when you have to make a payroll and you have no cash, you are desperate. And under this situation or circumstance, your brain will run at full throttle. In fact, you may even burn it up a little bit.

But just like any other muscle, those cycles, those repetitions, will harden and strengthen that muscle. And in turn, you will become a stronger and more effective person.

Give people money and the opposite occurs. They become undesperate. They become soft.

I hope our schools are listening to what we’re saying here. I pray that they are.

Because when you study the really great entrepreneurs of the 20th and 21st centuries, you will invariably find that the ones who lasted --- the ones who are not mere “one and done” successes --- are the ones who have experienced desperation, depravation, and the attendant “brain-hardening.”

As Yogi Berra once said, “You can look it up.”