When Financing Becomes *THE* Goal

Startups that complete private equity deals with notable angel investors or venture capital firms often get the most press. As a result, perhaps too many startups get caught up in the notion of seeking private equity financing; for some startups, rather than building a successful business or creating the best product or capturing the most market share, getting that private equity deal becomes *THE* goal of the business. While some startups do need private equity to become successful, such startups are perhaps only a small fraction of the total startups.

As a general rule of thumb, private equity (particularly of the angel/VC type) is really only necessary if (1) the goal is to build a billion-dollar business, or (2) the funding, which often reaches millions of dollars, is needed to significantly accelerate the growth of the company in order to seize upon an opportunity (such as being the first product of its kind on the market). Many entrepreneurs want to be the next Larry Paige, Elon Musk, or Mark Zuckerberg, with the money and the fame that comes with attaining that level, but it is also just as rewarding to build a successful, smaller business that still makes plenty of money for the founders, creates jobs, and allows the people at the company to work on what they love.

Seeking private equity brings in and gives up a measure of control to investors whose primary concern is obtaining a return on their investment (although they may also be excited about your product, they’re not going to invest if they didn’t think they were going to make money off of their investment). Indeed, by having investors the company can trigger legal duties to maximize the value of investors’ stakes, rather than focus on other goals that help build a business that creates jobs or make a product that changes the world

Private equity is a heavy burden whose benefits outweigh that burden only if they company needs the cash, now; the best form of financing will always be sales to customers — entrepreneurs should always keep the focus on selling their product. Entrepreneurs should take a long, hard look at their company and decide whether it really has the potential become a billion-dollar business or if it really needs to expand fast, right now. If the answer isn’t yes, then the company may not need private equity. That’s not to say, of course, that the company should reject any and all investment offers — if a good financing opportunity comes around, it shouldn’t be categorically denied. However, startups that don’t really need private equity financing shouldn’t make that the goal of the company.