The Weight of Entrepreneurial Funding

Recently the New York Times featured a piece that posed an interesting question for entrepreneurs. Is it worth it to sacrifice ownership of your company for quick growth? When it comes down to it, the answer is an individual one. But if you want to have the option of MAKING that decision yourself, you need to understand the impacts of different funding sources.

The NYT story featured the different paths of two entrepreneurs took when building their businesses. Roman Stanek, who’d already started several successful business, used $50 million of venture capital funds to found San Francisco-based Good Data. He believed that such a large upfront investment was necessary in order for the company to provide services to established corporations with vast numbers of customers. Estimates for Good Data’s annual revenue are at least $4 million, an impressive number for sure, but nowhere near the Stanek’s desired goal of a $1 billion net worth.

Robert Moore started RJMetrics, a data analytics company as well, but eschewed larger corporations for small and midsize businesses. Unlike Stanek, Moore was content to grow his company at a more gradual pace and didn’t seek outside financing until after the three year mark.

The current state of each business directly reflects its founders choice in funding. Good Data, with 250 employees and a marketing department that makes up half of the company, and RJMetrics with a staff around one tenth of that but an annual revenue of $2 million, half of Stanek’s company. Neither of the business owners revealed their exact ownership percentages, Stanek admits to not holding majority in a company he created. Moore says his percentage is “atypically high” compared to similar firms.

The lesson here is an obvious one. While accepting funding from venture capitalists may allow your start-up rapid advancement, it also comes with an equal sacrifice. Many investors demand a seat on the board of directors or other governing body plus a preferred cumulative dividend. And if the business pulls in less than stellar numbers for a number of years, the resulting dividends owed to investors may leave a whole lot of nothing for founders and employees. Ultimately, the decision to utilize outside financing should stem from how much the entrepreneur values maintaining control. So before you go and hit up your best friend’s rich uncle so you can get your start up moving, just ask yourself: What’s more important to you? Making money quickly or your fulfilled vision for the company?

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