The default option for entrepreneurs should be to not raise money

There’s a very interesting piece by Felix Salmon on Wired that has some very interesting nuggets and takeaways for entrepreneurs. I am highlighting the most important parts, but the entire article is worth a read.

This goes back to my original thesis that the entrepreneurs should bootstrap as much as possible because only 16% of companies in the Inc. 500 list from 1997 – 2007 actually raised VC money (read the Wired piece). Rest were self funded. Out side of technology that number is lower.

Going public might be good for a company’s investors and employees, but it is usually bad for the company itself. It forces CEOs to focus on short-term stock fluctuations at the expense of long-term growth. It wrests control from the founders and gives it to thousands of faceless shareholders.

To put it another way, the VC model is based on creating wealth for investors, not on building successful businesses.

(2011) Last year 429 VC-backed companies were acquired, while 52 went public

In 2009 Paul Kedrosky, a Kauffman Foundation senior fellow and venture capitalist, looked at the Inc. 500 list of the fastest-growing companies in the US for every year between 1997 and 2007—a period that includes the VC boom of 1999-2000. He found about 900 companies in all, of which only 16 percent had VC backing.

 

Advertisements

One thought on “The default option for entrepreneurs should be to not raise money”

  1. While there is no doubt that too much OPM (Other People’s Money) is going around the startup world, raising external money has benefits. Even with Sarbanes-Oxley regulations, plenty of companies go public, because that is the most logical thing to go.

    1. In a bootstrapped company, the minority stakeholders and employees have very little equity rights. They can get their worth instantly wiped (remember Eduordo Savarin). With stock grants and options they have more incentive and rights in a publicly traded company. They can also quit the company easily without having their stakes going worthless.

    2. Raising money is kind of a stamp of approval that the company is strong. It is similar to the Harvard degree that entrepreneurs take in, just to dropout :). That is the primary reason why Google took the unnecessary late stage fundings and IPO.

    3. By raising VC money and eventually going for IPO, the customers, partners and public are better assured that a more stable management that doesn’t work purely by the founder’s whims, is put in place.

    4. Publicly traded companies and even VC-funded ones get a lot of free marketing through financial analysts, as press covers them more often. This is because in these companies there are plenty of stakeholders who would be interested in reading the article. OTOH, in a bootstrapped company no financial analyst worth salt might cover the financials of the company, however big it is, as only the founders have cash incentives.

    In summary, bootstrapping is a good way to start, but at some point the company has to take in the external funding even without the need for extra cash.

Comments are closed.