I am starting-off a venture with limited capital that will be sufficient to keep my business afloat for at least 12-18 months. I believe that my product will get some traction during this period, allowing me to finance my operations in the future.
Although, many entrepreneurs seek VC or other funding to finance their operations, I have been very skeptical of taking that route. I believe that taking funding will loosen my control on my company, and will also deprive me of the gains that my business may produce. (I know that the lack of funding will also limit my ability to expand my operations)
Do you think it is justifiable to have such views on funding? Is taking funding and losing controlling stake a part of every business?
If you're in a position where you can take money from investors, hopefully you're also at a place where you can choose who you take the money from. If you're drowning in debt, you're not generating any revenue, personally burnt out, and have a mediocre product, then you really aren't in any position to be picky -- take money or die (and the latter might even be the better choice).
If you're in a good position, then the issue isn't so much about how much control you give up, but whether or not you have the right investor.
The right investor can take 25% of the company for $X and add 10x that value over time. The wrong investor doesn't add any additional value, and now you've given up 25% of your company for "just money".
The right investor is more interested in building a great company than in how much of it they control. They realize that the entrepreneur must remain engaged and motivated in order for the company to succeed, and are more focused on making the right investments than micromanaging startups. The investor who doesn't see you as the right person for the job and wants to control the day-to-day might as well just buy the company outright or steal your idea and start a competing one.
There is no one size fits all.
You have to understand the competition climate, the market and the size of the company that you want to build. It comes back to you, the entrepreneur.
If you think it is justifiable, then, it is. You can find famous example on both sides of the equations.
No. Taking funding and losing controlling stake is not part of every business. Peldi's from Balsamiq didn't need funding (AFAIK) and have full control of his company. Seems to be doing great. Other example: 37Signals, Fog Creek Software, Craigslist etc.
For me personally, loosing a bit of control (provided i am qualified to run it) on a very big pie is okay, rather than having full control on a worthless pie. If all my competitors are spending crazy advertising money to secure an emerging market, i would be stupid for not taking funding and lose the whole market altogether. Reid Hoffman gave a good talk about financing strategy here: http://ecorner.stanford.edu/authorMaterialInfo.html?mid=1687 Hope that helps.
Are you even reasonably sure you can secure funding? A lot more people talk about investors than have actually dealt with them. I think there's a perception that all kinds of investors are standing on the sidelines waiting to throw money at anyone.
Before you try to decide whether or not you should get funding, you might want to find out if you can get funding. Talk to other entrepreneurs in your area doing similar things. Ask what their experiences are with seeking investment. If no one else is getting funded, the decision to get investment or not may have already been made for you.
All good answers. But keep in mind that not all funding sources are dilutive. Elsewhere I've pointed out some of the ways you can create a board of advisors for your business. One of the main reasons you'd want to do so is to build a pool of smart, invested (emotionally) people who can help you identify and exploit strategic partnership opportunities.
Strategic partnerships may include licensing, distribution, or other types of arrangements, and often involve up-front cash you can use to build your company.
If you believe that you'll have a product and some customers by the time you need cash, then consider what types of strategic relationships you can form that result in an infusion of capital without loss of control. What partners would make sense? What will your company be able to offer such a partner at the point you are looking for funds? Begin planning now so that your business plan and your selection of strategic advisors can take those factors into account.
I'm with Micah on this one. Raising institutional funding for a startup is a difficult thing to do. Your company might not be a good fit, you might not find a firm that's interested in your particular sector, the idea itself might not have sufficient probability to generate the kinds of returns necessary, etc.
Everyone talks about how "cash is plentiful" in the VC business and that there's too much cash chasing too few ideas. Although this may be true, the cash is not evenly distributed and only a small fraction of startups that seek venture funding ever get it.
But lets assume you had access to investment money: Then, it's a matter of deciding whether the business needs the money to become what you want it to become.
Depending on the business, you might be better off "Bootstrapping" your start-up by rolling any revenue into the business. This is one of the principles of "Lean Start-ups," a term coined by Eric Ries.
Check out Eric's blog here:
http://www.startuplessonslearned.com/2008/09/lean-startup.html And don't forget to read the other posts - not just that one.