How Your Company Can Survive for Hours at 38,000 Feet

38kFeetThe amazing story of the 15 year old boy who stowed away on a 5 1/2-hour flight in the frigid wheel well of a jet that flew from San Jose to Hawaii recently caused me to think about the need for Oxygen.

How does one survive a trip like that when the temperature would have dropped to more than 50 degrees below zero and the air would have been thinner than that at the top of Mount Everest?

Well, as it turns out there have been cases of such survival before, and there’s a theory about why the stowaways lived. The body temperatures drop so low that their metabolism drops and their need for oxygen is diminished – thankfully for the stowaway. I heard one commentator say that in the last half century there have been roughly 100 stowaway attempts on airliners. However – only 25 have survived. That’s 25% – not bad when you compare it to the number of businesses that are begun every year and wind up failing.

There are a number of reasons why business fail including bad advice from family members, going into business for the wrong reasons, lack of market awareness and a lack of focus. I am fortunate to see lots of different business – on average one deal a day. They are mostly tech deals – and the overwhelming reason they fail is due to lack of Oxygen – ie Capital. The importance of capital in building your business cannot be overstated.

No business can adequately survive without healthy sources of cash.

And yet – so many are reluctant to raise the cash they need. Typically their reasoning is their desire to maintain a very high percentage of ownership. They also are fearful of bringing in people that will provide oversight to the business. Stated another way, they want to “maintain control.” They also dislike the proposition of bringing in a “vulture capitalist.”  They tell me that they have heard horror stories about how a VC will get in and destroy a business.

I am here to tell you that my experience is NOT THAT. 

To me Venture Capitalists and Smart Angel Investors, more often than not, bring several things that are essential to building a healthy and sustainable business. The first and foremost is: MONEY

But they also bring access to potential strategic partners, introductions to customers, advice on allocating company resources, and overall accountability.

But most importantly . . .”Show Me the Money.”

This may surprise some, but I welcome reducing my ownership in a given business if it means I can access the capital I need to build my business quickly. In my world of High tech, it is often the company that gets into the market first or second, driven by VC investment, that wins the game..

Stated another way, in the end, I would rather have a small piece of a very large pie than a really big piece of a small pie.

Look at the numbers:

Let’s say I go into a business and I own 50% of an entity. Sounds pretty good- huh? But let’s also say I decide I want to maintain my majority ownership so I can “keep control.” So I make the conscious decision to not raise institutional funds. Now let’s say that, despite my lack of capital, the business grows and we create a valuation of $10 Million dollars for that business. That means—on paper at least—I am worth $5 Million bucks.

But my preferred mode is this: Bring in substantial portions of money so I can grow the business quickly and secure our position in the market. As I do that from Venture Capital folks, over a couple of years, my ownership percentage may drop to 10%. But if I have done the right things with that business and the money that has been invested by my funding sources, the valuation of the company might well be $100 Million or more.

So from a pure dollars and cents perspective, I would rather have 10% of a 100 Million dollar business (i.e. 10 million) than 50% of a $10 million dollar company.

My advice to entrepreneurs is this: Don’t be greedy about maintaining a high percentage of ownership. Don’t be penny-wise and pound foolish. Of course, there are instances (but I would say they are rare) where people in the tech space have built out high valuations for companies without the help of outside financing. If people can pull that off, great. But the odds are against you.

If you want your business to survive at 38,000 feet where the competition is fierce and only a few will survive, take that capital and secure your market position, ensure the long-term health of your business and don’t be afraid to lower your percentage ownership to help ensure you are a winner in the market.

What do you think? I’d love your thoughts in the comments section below.

 

Posted in Posted in Entrepreneurship  |  6 Comments

6 thoughts on “How Your Company Can Survive for Hours at 38,000 Feet”

  1. There is a balance to be maintained, but what might appear at first as a sacrifice to stay afloat, is in the end a blessing. At least it was for me. I took on investors in one business, and it was the best thing I did. In the end it did 13x ROI. I was reluctant at first, but it became clear there really was no other way.

  2. Great advice! We are currently right at the stage of how much longer do we wait to bring real capital to the table. The toss up with us is if we are patient and give it another month or two we can show a lot more results to an angel investor or VC as opposed to taking money now, giving away a large majority of the company with minimal numbers to show forth.

  3. My former boss needs to read this!! He hired me last year to help him launch his higher education consulting practice in the Corporate sector. He put in his own money to fund a new branding/logo/website effort, and one mass mailing to corporate executives, but was frustrated when after a few months with our new website launched, we weren’t getting any inquiries or able to find companies interested in hiring us. He even went through the demonstrations of hiring a “sales/marketing manager” but fired him after 3 months because we weren’t getting any business and “he just wasn’t working out. He wasn’t the right fit.” Never mind that this sales/marketing manager had a proven track record of selling similar consulting services and landing multi-million dollar training contracts. This guy never had a chance to build relationships for our new consultancy! The issue always came back to “money.” I told my boss several times that he needed capital, and should seek outside investors. I even identified a few firms that funded companies in our education/learning space, but my boss said, “Nah, they want too much equity, they want too big of a stake in the company.” So, guess what: after one year, my boss folded up the Corporate practice. “Well, it just didn’t work. We gave it a year and it didn’t work.” I told him, “No, we spent a year re-branding with a new logo, website, and getting consultants on our roster, but we only had a few months to actually start pitching our services to the general public, and we had zero dollars for sustained, repetitive advertising and marketing.” And on, and on. My boss, coming from a long career in higher education, simply could not understand the value of capital, and the rule “It takes money to make money.” He wanted to keep 100% equity to himself, but in the end, he threw away thousands and thousands of his own money trying to launch a Corporate practice group when really, his heart wasn’t in it, and he wanted to keep the winnings to himself

  4. I could not agree more, David. The only way to grow is to have access to capital or to be so lucky that you “find” great channel partners that will grow your market in spite of your capital starved position. I prefer to leave “luck” out of the business equation and to go after capital that will allow you to survive and then thrive. It does take money to make money and for a tech company it is marketing and innovation (R&D) that produce results – everything else is cost (paraphrased from Peter Drucker). The past several years have created an oxygen deprivation environment for many tech companies and I look forward to brighter times in the near future. Not being willing to share a piece of the pie is not just short sighted it is opportunity limiting. Great application from a life event to business reality. Thank you for sharing!

  5. I agree that cash is king, But I don’t know the percentages of companies funded by VC or angels that make it to $100 million in your example. While the chances, provided the company had the market saavy and focus to make it to $10 million in your example, (otherwise why would the VC invest?) that further growth at that level could be purchased by the $10 million dollar company without loss of equity are much better. In my experience, its not the control that makes the vulture capital misnomer, it’s investors taking long looks at deals that would not only survive without their capital (gumming up growth) until they had just the right formula to give them low risk equity in already successful business models. Too often my clients have heard about so called expertise that was no greater than those already present and too often growth strategies were criticized enough to carve out larger portions of equity in the name of “risk” when, in fact, the only risk was the speed of growth not the question of growth. Gone are the days I fear of venture and angel money taking greater risks than perhaps factoring receivables since most bullish VC want to make money the moment they write the check not 6 months later. While capital is king, I agree, it is a disservice to always take the capital since the costs can be varying and often result in needless dilution. It takes money to make money but I favor organic growth over investment––if the business model is good enough for investors it should be good enough for organic growth.I’ll take money for sustained marketing but rarely do I find investors willing to take that risk, they want to see sales and traction first before investing–so all things being equal If my clients are already making the same effort to demonstrate sales and getting that reference application before injections of capital, then why should they part with equity unless its accelerates that process in a leap frog effort to get to revenues that would make their dilution–according to your math example ––worth it? And who says $100 million is where most entrepreneurs want to be? Most of my clients would love a $20 million family business that is sustainable over time and not fret with the complications that come from having to grow to $100 million just to “break even” on their investment choice.

  6. I agree. In an ideal world, we’d all like to fund our own business and maintain control. Success is its own undoing though. It is the rare case (almost unheard of) that can grow to any significant size without outside cash. It is nearly impossible. The bigger most companies get, the more cash they need. It seems backwards, but it is true. Narrower slice of a larger pie CAN equal more pie for you….as long as you can get that pie big enough. Don’t fear partners–just pray you get the right ones. Its as serious as getting married.

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