15% is Bigger than Zero

We are big fans of bootstrapping here at Tech-Rx! Not only does it allow you to maintain direction for your company and focus on the product, but it delays the need for outside investors as long as possible. Every time you trade cash for company equity, you are decreasing your amount of ownership in the company you built from the ground up. But at one point you are going to need outside funding if you are planning to grow (unless you have a hefty inheritance in your back pocket). Below is a simple infographic of how funding works and why you want to limit the number of funding rounds you participate in.
Retrieved from http://fundersandfounders.com/how-funding-works-splitting-equity/
Retrieved from http://fundersandfounders.com/how-funding-works-splitting-equity/

So why are we telling you this? For the majority of companies, if they want to succeed they must scale! And scaling takes cash. It is coming to terms to the alternative: a slow death. We work with a lot of these companies that failed to scale so we implore you to re-examine your company or investment and evaluate what needs to be done to achieve success. Sometimes it is another fundraising round, other times it is a business pivot, whatever the solution is, it must be done!

We work with many companies where the decision comes down to an injection of cash in exchange for everyone’s shares shrinking a bit more or doomed failure. This is where we say, something is better than nothing! Think about it, 15% of $1,000,000 is bigger than zero, right? Even .5% of $1,000,000 is better than nothing.

But, let’s just say for a moment, that your company is worth maybe $1,000,000 today (unlikely unless it is growing) and you own 80%.  And let’s just say that you want to grow but need another $2,000,000 for sales and marketing (otherwise, you will just plod along until some competitors pushed your face into the dirt). And let’s just say that the new money wants 85% of the company (forgetting about voting rights for just a second).  If that $2 million turns your company into one worth $100 million, how bad off are you?  (Do the math, please.)  And if you don’t take the new money and eventually get lucky and sell the company, how likely is it that the company will be worth more than $18 million? (Again, please do the math.)

Percentages don’t matter; your pile of cash at the end of the game is what matters.  Yes, there are a hundred different reasons why people start companies rather than just getting rich.  And I can argue all day long that those reasons are important as motivating factors.  However, without money, those other more-noble goals will never be accomplished.

What are your thoughts on bootstrapping, multiple rounds or investor cram down? We would love to hear your stories in the comment section below.

-Steve Hogan, Managing Partner, Tech-Rx