You’re sitting at a restaurant having lunch with two friends, Pat and Chris. They’re both entrepreneurs and coincidentally, they both just completed a funding round of $1 million for their businesses.
You ask them to tell you the details of their raises.
I brought on an investor who now owns 50% of my business. The investor has a seat on my board of directors and is there to help me make sure my business grows as fast as possible because our goal is to sell the company within the next 5 to 7 years. The investor has veto power over any big decisions I make. Basically, the investor is my boss. What we’re hoping will happen is that in 5 to 7 years when we sell the business, we’ll all make a huge amount of money. In the meantime, the investor is watching my like a hawk to make sure I work my butt off so that the business will become an attractive target for acquisition.
I brought on some investors who trust me to make good decisions about the business and they’re very busy people so they didn’t want any control or ability to participate in the management. If I ask them for support, they’re usually happy to give it, though. At the end of every fiscal year, we look at our books and determine whether we can afford to pay a dividend to the investors out of our profits. We try to pay a dividend of at least 4% per year (meaning the investors get 4% of the total amount they invested). If an investor wants to exit his or her investment, we have a mechanism that allows us to either bring in a new investor to be able to pay that investor back or to buy the investor out using our own reserves. In either case, the investor can never get back out more than what he or she initially put in.
Which one sounds like the better deal to you? Of course there is no right answer – there are pros and cons to both. But in the world that worships Silicon Valley style investing, Chris would be seen as a success and Pat might be seen as a bit of a loser. This is a bit strange since Pat was able to keep control, has a much lower cost of capital, and does not have to put in 120 hour weeks to make sure the company becomes an acquisition target as quickly as possible.
The take home message? Don’t get caught up in how others define success – do what is best for you and where you want to take your business. There is more than one way to raise capital and the Silicon Valley style is not right for everyone. In fact, less than one percent of business go that route! Who cares whether you’re touted as one of the exclusive club of VC-backed company founders if you raise the money you need and you’re running your company on your own terms?
To learn more about alternatives to the Silicon Valley, funding model, apply for a Capital Raising Strategy Session.