12 reasons never to fundraise for your own business

12 reasons never to fundraise for your own business
19 June 2019

I recently worked out that over the last 20 years, I’ve been involved with raising about USD 300m for two dozen entities across four continents. This doesn’t make me the world’s most experienced fundraising expert, but it allows me to have a reasonably informed opinion about what it means to acquire and manage external investors.

My conclusion in a nutshell: If you can avoid it, don’t ever try to raise funds and stay away from having any external investor own a stake in your company.

There isn’t much glamour in fundraising – quite the opposite

“I never imagined how difficult fundraising is going to be” is a sentence I’ve heard from more entrepreneurs than I can even keep count of. If you have not yet tried yourself to make other people part from their money, you are likely going to be surprised just what an uphill battle it is to move investors from saying “I am interested” to signing a cheque that is made out to your company.

It often baffles me that fundraising and getting investors onboard still get glamourised in the media and entrepreneurs’ folk tales.

Let me tell you, there is very little to justify glamourising it.

Who this article is not for (or less so)

My list of 12 reasons to stay away from fundraising comes with three caveats:

  • For some businesses, this thinking will simply not apply and not be feasible (for any number of reasons).
  • For those businesses where it is possible, some of these points will apply or be a priority, and some won’t apply or be a mere bonus.
  • You may simply be a rare, exceptional genius for fundraising and managing companies with external shareholders, in which case all of my concerns are irrelevant to you. Consider yourself to be a one-in-a-million exception.

Also, whenever I refer below to you owning 100% of your business, you could read this as owning your business among a small, tight group of co-founders. The article really primarily relates to the issue of raising funding from “outside” investors, i.e., accepting shareholders that you take onboard solely for funding reasons, not because you want co-founders. Having actual co-founders is a separate matter altogether.

With this in mind, here is why I strongly urge any entrepreneur to strive for keeping 100% of their business and never get involved in raising funds.

1. Investors make you set entirely unrealistic targets

Investors are upside-driven. They will probably make you do things to increase their upside, including things that you don’t always consider the best decisions for your business. Chances are you’ll probably already set rather unrealistic targets in your pitch deck, knowing that you have to excite and engage an audience that is all about (extreme) upside.

You will change the risk profile of your company. You will carry out decisions and changes that are in contrast to how you would manage your company if it weren’t for having to win over these potential external investors.

This is true to a differing degree for different kinds of funding. Most entrepreneurs will be looking for seed funding or some form of early-stage funding. Even Bill Earner, managing partner at Connect Ventures, who makes a living out of funding early-stage companies, advised:

“My approach would be to figure out how to run your business without external funding.”

Does advice from someone with enormous industry insights get any clearer than this?

Ignore it at your own peril.

2. External funding is really expensive

This point is the longest one on the list, but it deserves the extra space.

Because of the extremely high percentage of companies that simply don’t work out, investors need to get a significant stake in your company in exchange for the money they give you.

As a rule of thumb, with each funding round, your stake will be diluted by about 20%.

If your business requires four funding rounds, your stake will decrease rapidly:

  • You’ll own 80% after the first funding round.
  • You’ll own 64% after the second funding round.
  • You’ll own 51% after the third funding round.
  • You’ll own 41% after the fourth funding round.

That’s if you negotiate well and everything goes according to plan! Many entrepreneurs end up giving away much higher stakes in their business. How many enterprises ever develop according to plan?

In between your business planning and fundraising preparations, have you ever worked out how the financial model would look like if you grew the business slower but then ended up owning a bigger stake in something that will eventually throw off money at compounding rates?

I have several friends who decided to do just that. Obviously, that led to their businesses growing at “just” 20-30% per year, rather than more headline-worthy rates. The real kicker of this usually sets in after 15 or 20 years. That when things start to compound, which is a mathematical miracle.

An average annual growth rate of 20% over such a period makes your business grow:

  • By a factor of 2.5 after 5 years.
  • By a factor of 6 after 10 years.
  • By a factor of 15 after 15 years.
  • By a factor of 38 after 20 years.

Obviously, everyone dreams of starting a company with very little investment of their own, getting it funded by venture capitalists, and retiring to the Caribbean after a spectacular exit or IPO a few short years later. However, these cases are so rare that you are almost more likely to win the lottery.

You’ll have a much higher chance for success if you focussed on gradually developing your business into a growing, reliable cash-earner where eventually you start to reap the power of compounding.

If you set up your business sometime between the age of 20 and 45, growing something for 15 or 20 years is entirely feasible without you having to work beyond conventional retirement age. Even if you are a late starter, you’ll probably have decades where you’ll be able to milk such a business.

By not raising outside money, you’ll have a higher likelihood of success (because no one is interfering with your decisions, and only you know what is best for your business), you’ll end up owning a bigger part of the pie (ideally, 100%), and you’ll own the closest thing you can get to a money printing machine (for the rest of your life, and with the option to pass it on to your heirs).

I have seen several people setting out in a way that at the time looked like they were growing at tortoise speed. It wasn’t glamorous, and they didn’t get to speak on the brightly-lit stages of pitch events in Silicon Valley.

You’ll have a much higher chance for success if you focussed on gradually developing your business into a growing, reliable cash-earner where eventually you start to reap the power of compounding.

But they subsequently outlived – tortoise-style – most other would-be entrepreneurs, and they are now in the most comfortable position anyone can imagine because they own 100% of their company and cash is literally raining down on them on a daily basis.

Giving up this prospect and allowing others to buy a stake in your business early on is a very, very expensive way of getting funding. You can also look at it from the following perspective: If your business works out, then the stake you gave to your early-stage funders subsidises all the other failures they have had to put up with in their portfolio.

Hand on heart – have you run a financial model for such a scenario for the business that you intend to grow?

If you haven’t yet, then I urge you to look at it and see how it compares.

This could be the most critical calculation you have done in your life, and it deserves getting at least some serious thought and modelling before you commit to one or the other route.

3. You’ll get brain damage from dealing with uninformed investors

No one will ever know and understand your business as well as you do.

Even worse, different people will all have their own idea about what is best for your company, what the strategy should look like, and how the longer-term goals should be re-adjusted each time you get to milestones that make you re-evaluate them.

You’ll have to continually educate your investors, which takes up a lot of your time.

You’ll regularly tear your own hair out over investors who simply “don’t get it”, which is not good for your blood pressure.

Often enough, some of their uninformed thinking will end up influencing how your business is run, which might damage your long-term financial success. Remember when a board of directors representing ignorant investors fired Steve Jobs from Apple (after he had given up majority control of the company to raise funds) and then ran his company into the ground? Exactly!

Investors, even professional ones, are much less well-informed than you think they are. They will usually have dozens of investments to look after, leaving limited time to understand your issues. Just as much as you will love them in that special moment when they are handing their money over to you, you will learn to hate (some of) them when you have to deal with their limitations and deficiencies on an ongoing basis.

4. Unprofessional funders will screw up your business structure

This particular point is noteworthy in the day and age of so-called “angel investors” (an oxymoron in many ways – if investors were angels, they’d gift you money).

Just as it has become fashionable for young people to be a start-up entrepreneur, has it become fashionable for the more mature crowds to hold themselves out as angel investors. LinkedIn is awash with people who call themselves angel investors in their profiles, not the least because it is a politically acceptable way of signalling that you are a person of wealth and success (without anyone checking to what degree this is true). Angel investor databases nowadays have tens of thousands of members registered, and places like London host more angel investor events than anyone can keep count of.

The truth is, most angel investors are bored and looking for entertainment.

I once met one of the world’s most experienced people in dealing with angel investors, Bill Morrow, the founder of Angels Den, the global angel investor network with 20,000 members. Here is what I wrote about the presentation I attended:

“Like most anyone, Bill had assumed that angel investors were investing to make money.

But when he started to ask them about their motives for making angel investments …. it turned out that making money only came in at #3.

Motive #1 was boredom in life. Angel investors had made it already financially and were looking for entertainment and having fun.”

In their quest for entertainment, a large number of these so-called angels don’t have the experience that is required to be a responsible, value-adding angel investor.

The classic case is a “clever” angel investor who uses an entrepreneur’s lack of funding to negotiate as big a stake for themselves as possible. The result of which is that professional investors such as venture capitalists will view that business as un-fundable from there onwards, as they always want the founder(s) to have a meaningful stake.

Don’t be a victim of an angel who will bring hell to your business!

5. You lose your ability to shift your tax residence

I am amazed at how seldom anyone even talks about this point (I’d say that 9 out 10 entrepreneurs do not have it on their radar screen at all).

Even before you have taken a single external shareholder onboard, there is already one shareholder of sorts: the government of your country of residence. Once you add up profit taxes on a corporate level, taxes on the income you receive as director, taxes on dividends, capital gains taxes on an eventual sale and other taxes you pay along the way, just how large a stake the government owns in your business is staggering. In most countries, taxation applying on multiple levels means that the government owns a 20-70% stake in your company before you have even taken any actual shareholders onboard.

Unless, of course, you live in a business haven where tax rates are much lower.

Choosing the right tax residency is a complicated question and very much down to personal preferences and circumstances. However, it is objectively true that if you own 100% of a business, it’ll simply be easier if you decide to move parts or all of your business to a place where the taxman takes a smaller bite out of what you have created. You’ll be in sole charge of making this decision, without any other shareholders getting in your way and complicating matters.

In most countries, taxation applying on multiple levels means that the government owns a 20-70% stake in your company before you have even taken any actual shareholders onboard.

I’d say that at least 5 out of 10 entrepreneurs that I know personally would have entirely feasible options to improve not just their tax planning, but also their lifestyle. However, hardly anyone even looks at those. Or if they do, they do so when it’s too late to make changes.

If this sounds like an aspect you’d like to hear more about, make sure you keep an eye on this website.

6. Recruiting top-talent CAN be easier

There are always two sides to each coin.

It is true, indeed, that a lot of fantastic talent are only available to work for companies that are backed by investors and offer equity participation or similar incentives, often combined with the prospect of an IPO.

However, different things work for different people. There is also a large class of people whose talent is only available to your business if you offer a sane, stress-free work environment to them. These people don’t want the drama, the pressure, and the additional risks of a company that has investors breathing down its neck.

If you own 100% of your business and don’t have external funders, you’ll find that there is a fantastic cohort of talent available to you on the job market. People that otherwise wouldn’t be willing to work for you.

This is under-reported, but it’s a fact. I have, myself, found such co-workers. I estimate that this group of people is actually growing in numbers.

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7. You save heaps of time by not having to do external reporting

External shareholders require a hell of a lot of work to keep them informed and happy.

You will have to create reporting that is required for legal reasons, either because of law or because your funding agreements call for it.

Then there is all the “soft reporting” you end up doing, such as going out for lunches and dinners with individual investors. Which can be very worthwhile if you have astute, value-adding investors whose brains you can pick for the price of a plate of fries. Or it can be a nightmare if you are funded by an angel who is looking for entertainment.

In any case, it’ll suck in quite a lot of your time. If you let someone else do it for you, it’ll cost you money. Either way, it’s a drag on the business that needs to be taken care of somehow. There is definitely an opportunity cost, and one that adds to external funding usually being quite expensive already.

Without external investors, you could invest that money and time in growing your business. You could then focus on making sure your average annual growth rate over the next 20 years (see point 2) isn’t 20%, but 22%.

This sounds like a small change, but over the course of 20 years, it’ll lead to your business growing by a factor of 53 instead of 38.

Small changes can have a massive impact in the long-run, but only if you have the time to focus on making them happen.

8. You will be able to stick to your values – 100% and without compromise

This point is a sub-aspect of previous points, but one that is worth listing separately.

Personally, I have come to the conclusion that an ability to stick to your own values and be true to yourself at any and all times, is the greatest way for living your life. Pretty much every time I deviated from it, there was a price I had to pay. Once you have external funders, you’ll inevitably get into situations where you do things that, based on who you are and what you are, you wouldn’t otherwise have done.

With outside funders, you won’t be in full control of your company being a true and total reflection of what you stand for.

Looked at it from another perspective, I have always found substantial long-term value in being authentic. All the more as authenticity is an asset that is in short supply in our day and age.

With outside funders, you won’t be in full control of your company being a true and total reflection of what you stand for.

Without outside funders, you can offer genuine and total authenticity as part of your products and services. In the long-run, you’ll probably find this will add tremendously to the financial pay-off of your business, as well as to your quality of life, and possibly even your mental health and sanity.

9. You can focus on (soft) metrics other than EBITDA and quarterly earnings

I am building up my two websites with a definitive intention of turning them both into money-spinning enterprises (just in case you wonder, my other website is www.undervalued-shares.com and focusses on easily accessible, exciting equity investments that anyone can use to grow their nest egg). However, after almost three decades in the writing business, I have very strong opinions about how to achieve the biggest long-term success.

E.g., if I had external funders for my two websites, I’d probably have to show them month-on-month growth rates for my readership.

Since I don’t have outside funding, I can focus on the metrics that I consider are going to lead me to a much bigger long-term success than anything a financial investor could dream up. Right now, I am focussing on factors such as the sort of reader that my websites attract. For this, I could never present any definitive metrics. However, through communicating with my readers, I am 100% convinced that my websites are currently going precisely in the direction that I want them to go into. I want fewer readers but higher-quality ones. Imagine explaining that to investors who are used to looking at absolute numbers of users – because that’s what everyone else is focussing on.

Investors are notorious for caring too much about short-term results and neglecting longer-term consequences of actions that are driven to pretty up these short-term results.

If you don’t have any outside investors, you can focus all of your time, effort, and energy on the metrics that you know are the ones that truly matter. Which squares up nicely with some of the other points on this list.

10. Not having funding can be a good thing for your spending discipline

I once met Suzie Walker, founder of Primal Pantry, the popular paleo energy bar brand. Suzie told the story how she (and her co-founder) had GBP 16,000 in savings to invest, and a design agency asked her for GBP 4,000 to design the products.

As a single mother with no prior business experience to show, her chances of getting external funding outside of her immediate co-founder, were pretty much zero. Out of sheer necessity, Suzie made her money go further. Telling the design agency that she couldn’t possibly afford to spend a quarter of her working capital on product design, she eventually got the price down to a mere GBP 500 (combined with a promise to give them more business when she could afford).

This was a saving of 87.5%. If she had had the funding available to herself, would she have driven such a hard bargain? Probably not.

Work is said to always take up the entire time that you are willing to give it.

Budgets always end up taking up all the money that you have available to you. If you don’t have it, then you simply work even harder on your budget.

Nota bene, Suzie eventually got external funding, and it led her to make the wrong decisions. See points 1 and 3!

11. Selling your business will be so much easier

Another under-reported aspect of owning your business is the significant percentage of situations where shared ownership of a company screws up an eventual exit.

If more than one shareholder owns a business, there’ll all too often be differing opinions about when it should be sold, for what price, to whom, using what process, etc.

More often than anyone can imagine, this then leads to hostile, unproductive, and ineffective discussions and decisions. Many businesses have even been ruined because the shareholders couldn’t agree on the subject. This can be a lifetime’s work severely damaged on the last yards before a marathon’s finishing line. (I was once myself entangled in such a situation, and to this day it ranks as the biggest financial disaster of my life.)

If you own 100% of your business, you will never have this issue. You are significantly reducing the risk of something terrible happening to you and your wealth because of the all too frequent disagreements between shareholders about exits.

All you’ll have to worry about is when to sell, for how much, and to whom. You may also want to worry about how to reduce the taxes you have to pay on the one-off gain from the sale, see point 5.

As with everything in life, it’s best to keep things simple and remain in firm control.

12. Fundraising is going to take over your life for a longer period than you imagine

I am regularly amused when I listen to entrepreneurs telling me how they think that their fundraising will be done in one, two, or three months.

Many times, it’ll be more like one, two, or three years. If they ever manage to make it happen at all, given that most fundraising efforts lead to outright failure.

Obviously, all fundraisings are different. If you just need to find that one angel investor to give you an initial cash injection in the low five figures, you may be able to do this quite quickly. But if you are out for a serious amount of funding and you are looking to raise it from professional investors, it’s not going to happen overnight.

That’s also because most investors “want to invest in lines, not dots”. That’s another way for saying that investors like to meet you several times over a certain period and see whether you deliver. They need more than just one data point. This alone could lead to one round of fundraising taking well over six months (if not two years!).

Sometimes, a fundraise works out easily and quickly. Usually, though, it’ll be a multiple of the amount of time and work that you would have imagined.

As the lawyers say: “It all depends”

This was a rough run-through of all the points I advise anyone who is considering to fundraise and accept external investors to think through carefully.

As said at the beginning of this article, each situation is different, and what I set out above will not apply to every situation. If you want to shoot rockets into space or find a solution for malaria, you will most likely have to raise funds and accept outside shareholders (unless you are Jeff Bezos or Bill Gates). However, most readers of this website are looking for ways to turn their existing profession into a small business, and for those the insights described above are likely to be relevant.

Please do consider them carefully, even if some of them require extra work or force you to confront some difficult truths.

Did I forget anything?

Are there any aspects of fundraising that you think I forgot, or which you would like to see covered in future articles?

I am always happy to receive reader feedback and will do my best to incorporate any reader requests I receive by email.

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