By Ed McLaughlin and Wyn Lydecker
In baseball, you have two approaches to hitting. If you hold the bat at the very end, you can get a heck of a lot of power in your swing, but you’ll have less control once you set it in motion. If you choke up on the bat, you lose power, but gain control. Using venture capital to fund your startup is a similar situation: financial power and control are in an inverse relationship.
When I was starting USI, my accountant counseled me to use other people’s money (OPM), rather than risk my own. Using OPM would limit my personal risk, enable me to expand my business beyond the limits of my personal resources, and give me the extra financial backing to take advantage of opportunities that could suddenly present themselves. On the surface, that sounds like a great combination of monetary power and financial risk control, but OPM comes at a very high cost in terms of business control and relationships you may put at risk. If you have the financial wherewithal, I feel strongly that using your own money to fund your new business is the best path to take.
Venture capital, though, gets a lot more screen time than bootstrapping. “Shark Tank” averages over 6 million viewers per episode, according to Wikipedia, and there are heaps of stories floating around about angel investors and the miracles they make happen. While it is tempting to be part of the drama of winning a well-endowed investor over with your brilliant pitch and not having to worry about your own money as you start up, there are good reasons to stay away from VC. As the blog Model View Culture (MVC) discusses in its article, “Five Reasons Not To Raise Venture Capital,” outside funding comes at a proportional cost to control. Number 4 on the list is “When you raise venture, you narrow your options.” The section is entirely about retaining control of what’s yours. It is important to remember that one of the many reasons to start your own business is your desire to work for yourself. You want to have decision-making authority. You want to be responsible for the plan. You want to fulfill your vision. And you want to realize the value you’ve created. When you give up control – or even a portion of control – to someone else, you can jeopardize your vision, and loss of control can be a permanent decision.
Some entrepreneurs may need seed funding to jumpstart their growth. Typically, a service business like mine has a lower startup cost than a capital-intensive business, such as manufacturing or technology, which requires more fuel for liftoff. In those cases, it makes more sense to go for OPM. In addition to providing much-needed cash, investors can bring a valuable, fresh perspective to your business. They can provide excellent additions to the management team, such as an experienced CFO or COO. Good professional investors should have experience in your industry and be able to provide useful advice. If you do need outside funding, seek to work with people who understand you and your motivations and goals. Make sure the chemistry is strong and the relationship is built on a solid foundation of trust.
Should you use other people’s money or your own to transform your idea into a business? The alternatives within those categories are broad. Whatever you choose, remember that the key to maximizing personal satisfaction in pursuit of your new business venture is to maintain majority control over business strategy, decisions, and finance.
Ed McLaughlin is currently co-writing the book “The Purpose Is Profit: Secrets of a Successful Entrepreneur from Startup to Exit” with Wyn Lydecker and Paul McLaughlin.
Copyright © 2014 by Ed McLaughlin All rights reserved.