The Case For Turning Down Money
Ben Adlard, Former Viget
I've recently been thinking about different growth strategies and their consequences. We tend to have preconceived ideas that growth and revenues are the ultimate success metric, but the costs and tradeoffs of taking outside funding don't seem to be as widely discussed.
Firms who survive the start up period will, at some point or another, face a decision about whether or not to take outside funding. You could be on the verge of huge deal that would require you to scale your operations overnight, or you may have an opportunity to cross the chasm, a term coined by Geoffrey Moore in his book, Crossing the Chasm, for transitioning a company from early adopters to mainstream users. Doing so requires experienced senior management and renewed customer focus, both of which cost money. Doug Tatum lays out strategies for crossing the chasm in his book, No Man's Land: What to Do When Your Company is Too Big to Be Small but Too Small to Be Big.
The outcome of taking on the huge deal or successfully crossing the chasm can be sweet, but there are costs to taking money and going big. Basically it's not your money, so there are stings attached. As the adage goes, nothing in life is free. If you take private equity, the following scenarios are likely:
- you are no longer in charge - you now have to answer to investors. Their ideas for "your" company may not be as the same as yours.
- you may get switched out, your new bosses may not think you're up to the task. You could get sidelined, while a new guy is now in the CEO chair.
- buy outs can be attractive - if you're the owner. While you're at the beach, your loyal employees may be on the chopping block thanks to new management.
- investors expect a return on their investment - growth comes first, culture and work-life balance second. The fun work place you worked so hard to create is most likely soon to be ancient history.
There is the debt option. Borrow money from the bank and keep your shares. Note though that the consequences of failure are greater if you have debt, than if you gave stock. Banks want their money back, investors just lose their stock...
There is another option, though one not as widely talked about. Turn down the massive deal that will transform your company and stay on the safe side of the chasm. Retain control of your company by making a conscious decision to be great instead of big. Bo Burlingham coined the term in his book: Small Giants: Companies That Choose to Be Great Instead of Big. Instead of selling out:
- retain control of your company and lifestyle and resist the temptation to take funding.
- build healthy margins and invest your retained earnings back into the company.
- if you have an internal skills gap, invest in training your senior staff. After all these people have been with you since the beginning.
- continue to develop the culture you cherish and the vision you founded the company on.
- focus on your market niche and become the best in it. Don't try and be all things to all people.
There are downsides to becoming a Small Giant:
- if you're in it to cash out then this probably isn't for you.
- it may take you longer to reach your business objectives - saving investment dollars takes time.
- your industry may require large financial investments - if you're in oil and gas, you need a lot of cash. Fortunately, this is one of the advantages of an Internet business, low barriers to entry and cheap start up costs are attractive.
I recommend reading Burlingham's book which goes into greater detail and gives examples of actual companies who have faced these decisions. There is also an interesting Harvard Business School case on Big Spaceship which outlines the growth decisions facing their firm.
One of the things that attracted me to Viget was the founders decision to fund growth internally and not take outside funding. Therefore the entire staff enjoys a healthy work-life balance, greater influence on the firms future, and generally more control. At the same time, by working with a variety of early stage clients like Squidoo, Foodzie, Spoonflower, and Divvyshot we get to see first-hand the impact of their growth and funding decisions. We also get to share our strategic experience and ideas with new clients, which is something I particularly enjoy.
The right decision, of course, depends on your specific situation. Best of luck to you on whichever path you choose!