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Self-funding vs. Investment for a successful tech company

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I started my company 5 years ago, with nothing more than some good ideas about technology services for the music industry, and a lot of enthusiasm. My then partner and I worked day jobs while working on the new company project in the evenings and at weekends. A year later, we had gained a few clients and enough income to pay ourselves a minimum wage and concentrate on the new company full-time. The company has grown steadily since then. We now have 7 full time employees and we have enough spare income to think about how to further expand the business. The company has never incurred any significant debt and income has increased steady, but not really exponentially. In many ways it is the opposite model to a VC-funded tech start-up.

There are quite a few positive aspects to self-funding. We are in a position that as our client-base grows, we can offer better and better services at better prices. This is in contrast to a lot of freemium models where a free service is gradually made worse and worse to encourage people to go for the paid service. Another thing is that I don’t have to make business decisions to please any investors. An example of this is that we don’t hold any patents. I don’t agree with software patents and despite devising several innovative solutions, I don’t feel the need to stop other companies from copying these ideas (something that has happened on a few occasions). While this might not make the best business sense, and my guess is this would also be quite unattractive to an investor, it’s something I feel strongly about, and I’m glad to be in control of such decisions. Being completely independent brings other benefits too, for example being extremely agile in decision making; we are able to change tact and adapt to changing market conditions very quickly. Overall, I’m very proud of what we have achieved as a self-funded company, and also very happy that everyone that works here loves their job.

The downside to this model is that we are often slowed down by a lack of resources. As a small company, people end up doing more than one job and focusing on one thing can often lead to another thing being neglected. Business decisions need to be made with cashflow in mind and so are perhaps less bold than a company that starts off with millions in the bank. We’re working in a market that is full of exciting opportunities (and we’ve never been short on new ideas to exploit them), but again, with limited resources, I have to be very careful about deciding which of these ideas are worth exploring and how much time we can dedicate to them. We didn’t start off with the business knowledge, contacts, and expertise of an experienced hands-on investor, and so, we have had to work many business systems and strategies out from scratch. Some of these, for example our marketing strategy, are still quite under-developed after 5 years of trading. All aspects of the company have improved over time but it is a gradual process.

I’ve mostly been confident since starting the company that self-funding was the way to go. In fact, when we started, it was probably our only option. Things have changed now though and I was recently told that my company could be an exciting prospect to the right investor (which is what got me thinking about all of this in the first place). What I do not know, nor have any way to quantify, is whether we would be in a better position with the funds and expertise of an investor. At this stage of the company, should I be looking to give away equity in return for a boost in financial and managerial resources, or should I forget that as an option, and carry on going it alone?

There is obviously no single right answer to a question like this but I’m very interested to hear if anyone has any thoughts on the subject. Thanks.  
initiated Dec 5, 2011 in Business Models by Oliver Sutton (200 points)   1 2 3

3 Responses

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Don't sell ownership of your company unless you really, really have to. If you need the capital to grow, and you seriously believe you will, why not any other kind of loan? If you need to take investor money, you want to make sure that the investors bring more than money - expertise in a field you need it, connections, resources like office space, shared back-end, etc.

If it's a good business, run it yourself.
response added Dec 11, 2011 by Kevin Clark (1,470 points)   4 8 14
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So your company might be an "exciting prospect to the right investor"? I'd be very careful about anyone setting up a stall like that. Call me cynical but I'd be checking exactly how this person might be looking to get something out of any deal, either through facilitation or some kind of preference shares or introductory fee.

But, shiftiness aside, if your company is an attractive proposition, then it should be equally attractive for you to maintain control of it. I'd suggest that if you're doing ok on your own, and you're unsure whether to go for something different then you still need to do some more research. If you're surrending even a chunk of your equity and control then you've got to be damn sure that it's the right thing to do.

I reckon.
response added Dec 11, 2011 by drew stephenson (3,370 points)   3 10 22
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Thank you very much for your responses on this.

I think you're both right in that I should treat potential investment with caution. I can't say I'm convinced that not seeking investment is the way to go, but in a funny way, the whole thing became much clearer in my head through just explaining it in the post above, so while I don't have clarity on the way forward, I at least appreciate where I am a bit better!

I also found an interesting article on bootstrapping vs. VC funding yesterday
response added Jan 9, 2012 by Oliver Sutton (200 points)   1 2 3

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