Recently, I was reminded of something said by an investor during one of the talks I attended at Judge. It was a talk about funding, particularly venture capital funding. VCs love to ask you if you would rather have a smaller slice of a big pie or the whole piece of a small pie (or pizza). Whenever I was asked that question in the past I was unable to answer it because the question was incomplete – it depends on the size of the pie! However, VCs would like you to believe that a slice of a big pie was always better. Vultures!
You see, most entrepreneurs get hoodwinked into thinking that VC funding is the way to go to hit the big-money. We are constantly inundated with fantastical stories in the media about how some kid invented something in his parents’ kitchen, got some VC funding and became some multi-millionaire. The media just loves these sort of stories. There are also many entrepreneurs out there who made it big, without VC funding but their stories are just less sensational and too boring for our media to tell.
The investor taught us that VC funding may not be the right or ngam way to go for all businesses. He recounted the tale of a company that was founded by a single person with about £250,000 from his home mortgage. This entrepreneur did not get any additional investment throughout the lifetime of the business and did not dilute equity in the process. In the end, this person sold off the business for £60 million and got to bank the entire sum.
Then, the investor told us about a hypothetical scenario. This proved to be valuable lesson in equity dilution to those in the talk because few entrepreneurs want to think about this. If that entrepreneur went through a typical VC funding process and took on several rounds of funding, the entrepreneur might be lucky to be left with 5% of the business at the end. Assuming that the business was worth a whole billion at the end, that entrepreneur would finally bank £50 million.
Of course, £50 million or £60 million, both amount to fairly nice sums of money to have in the bank. However, the lesson here was – how many businesses reach the £1 billion mark? Not too many. So, it may be more profitable to do a £60 million single ownership business than a £1 billion corporation. Entrepreneurs should not fret too much if they get turned down by investors – it might actually be a blessing in disguise.
Anyway, this article by Paul Graham makes good reading.