I am fortunate to coach emerging businesses affiliated with Babson College. Midway through a recent coaching session discussing raising capital for his start-up, I asked a well put together entrepreneur in his early thirties (let's call him Andy) what he wanted to be when he grew up. Blank stare turned wry smile as Andy thought about the knock-on effects his resourcing decisions would have on his role as the Founder. From a business valuator's perspective, it is important to hear Andy's answer.
What value did Andy place on his company? What were his capital requirements for his growth plans? Andy's answer was that he wanted to consider the rest of our conversation first. Smart, as those numbers a founder like Andy choses is one of the best determinants of what a Founder's role will look like in the future. Andy's decision, and his willingness to accept its consequences engender either pain or happiness. If Andy were a valuation client, this part of my due diligence would be crucial to a successful engagement.
A few years back, I wrote a piece on this topic for Entrepreneur Handbook UK. It seems to recurr frequently, so I wanted to revisit. In early stage companies with no real operational history or investment, the valuation of the enterprise can be just as much a reflection of the type of investor (family, crowd, angel, strategic, venture) and how much of your company said investor gets for the investment as it is a reflection of the actual value of the company. The use of a minority transaction within the market approach is impacted by this scenario.
Andy's expectations are important when considering the price he needs to pay for the capital raised, including dilution of ownership, reduction of control. Both of course increase with the size of the investment. Andy wanted the ability to weather two failed attempts at engaging the market over an eighteen month period. Go big (expensive), or small (slow)?
As the conversation proceeded, Andy started thinking not just about himself, but also his team. He was unsure as to their thoughts on the effects that allocation of capital now and in the future, voting rights, economic participation etc. will have.
Andy's team had the perfect storm of personal situations, in that one was unsure as to his ability to leave a well paying job. Another wanted to jump in with both of her feet now, having burned her bridges to get the company off the ground.
Founders are the driving force that brings to the marketplace new products, services, revenue models; they are essential to our capitalist economy characterized by perpetual creative destruction. Yet, from the lens of their own growing companies, Founders can be both a blessing and a curse. A Founder’s relationship to the firm and its stakeholders will change along with the need to bring others into the organization. Given a Founder’s responsibility in architecting the firm it is likely that a Founder would obtain a role at the management or board level. Many Founders are also owners of their startup; they maintain some level of authority. That authority may be augmented through structurally important roles as a member of the management team or board of directors. But what of the persistence of Founder influence? How, when, why and to what ultimate degree are Founders involved in their firms as they grow? Know that all Founders will take their exit, either early or late in the life of the firm. How that happens is what matters. How that happens also depends on the amount of your fundraise. Typically, the bigger the raise, the faster the loss of Founder influence.
Here are a few snippets of what life for Founders is like as their companies grow. Founders face the choice of creating wealth or keeping control. Successful Founder- CEOs running fast growing startups tend to be removed quickly as their startup outgrows their entrepreneurial skill set. Every round of external financing increases the chances that a Founder-CEO will be removed, with the majority being involuntary. Those Founder-CEOs who initiate their own removal are more likely to remain involved, either on their company’s board, or in another executive position.
What about Founders themselves? Just who are they? What are they like? Are Founders normal, or extraordinary, or just…different? There exists the suggestion that Founders are complex combinations of traits normally found at the extremes of the general population. As a self-aware entrepreneur, can you see yourself operating at the extremes? For example, a flawed weakling on the one hand and a strong ounce of perfection on the other – much like Achilles. Let’s take another example – an outsider who was yet an insider; Oedipus was a foreign orphan yet king. The practical point here is that the Founder’s company will grow, hire people, and at some point raise capital. As it does so, those who become involved are less and less likely to have this duality that is characteristic of many a Founder. Reversion to the norm becomes a reality. Founders live the tragedy of being the perfect scapegoat – hero and villain. The King is dead, long live the King! The bigger the raise, the more likely the Founder will be the nutter, and ready scapegoat.
Did Andy choose to take the role of Founder? Perhaps the role has chosen him. Either way, his future comes down one decision: go big, or raise as you go. Build an exit or build a company. Our advice was that when he places an expectation of value his startup, that he should be cognizant of the choice. The decision says a lot about who Andy is. And, who he is going to determine where he goes to search out the capital necessary to fund his growth plans.
He never did answer my question.