Outside funding can be an important step for organizations, allowing them to expand and achieve far more than would be possible through organic growth. However, it is not a decision to be taken lightly, does not necessarily match the ambitions of all entrepreneurs, nor is it always the best decision for the organization. This article explores some of the reasons to be cautious before seeking and taking on outside investors.
Benefits of retaining ownership
Differences in ambitions
Possibly the primary reason why you should think twice between taking on external founding is if there is substantial differences in ambitions between you and the investors. While it is easy to assume alignment – at some level you both want success for your investment – but there may be discrepancies in your targets.
Investors are often motivated by the mega-successes – the ‘go for broke’ approaches to growing a firm, that while may achieve the unicorn success, it also associated with creating non-stainable firms, that never achieve profitability. If this ties with your ambitions, then great – however, if you are hoping to generate a sustainable source of income for a comfortable life, this may not be the best fit.
Broader the just differences in ambitions is the ability to retain full control over the company – and be able to make all decisions without outside influence. As part of investment, you typically will give some influence to an outside party – who may look to take a particularly active role if they disagree with actions that you are taking.
The ability to maintain control may be especially important if you have a very specific objective to what you want to achieve, and maybe especially so if that does not align with ‘profit maximization’. If you are for example planning on setting up a ‘social venture’, while it does not necessarily mean that you cannot find investors that align with your objectives, it is important to ensure that there is a clear understanding of this component of decision making.
Quicker decision making
A related benefit associated with maintaining full control is being able to make decisions quickly, without needing to involve third parties. One of the key advantages of a startup relative to a larger company is relatively limited bureaucracy – allowing pivoting and entering new areas quicker than would otherwise be possible for larger companies.
Brining on external investors can reduce the speed that you are able to make changes – especially so if they are required to sign-off on any substantial changes that the company makes.
Reduced external pressures
Beyond the impact that external parties can have on decision making is the additional pressure that they can bring to your company. While external pressure can be good – helping to raise ambitions and push you to achieve targets that you may otherwise not aim for – if you are primarily looking for a ‘lifestyle business’, having the additional pressure of others expecting higher profitability or growth, can be a burden that may negate the reason you established your company.
The risk of being removed from your company
The final danger of taking investors, connected with giving away control of your company, is the possibility that you are ultimately removed from your own company. The danger here is that founders are not always best suited to the managing larger companies – and at some point in time external investors may pressure or force that founders are replaced by more experienced managers.
External financing is clearly not necessarily bad – very few large firms are entirely founder/family owned. However, it does introduce certain risks to the organization, that may not align with the ambitions of all founders. It is important to be aware of these disadvantages – some level of caution can help reduce the risk of getting investors whose objectives substantially depart from your own.
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