The 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.