My partner formed his first company with two other partners more than 15 years ago.   The story goes something like this.  They each put up $25,000 and several years of sweat equity, and over time, built the company to a substantial, profitable business.  They sold the company for somewhere around $42 million, part cash, which is good, and part stock,  which over time became less valuable than compost.  Still, not a bad return for a $75,000 investment.

This past week I attended Storage Networking World in San Diego talking to the best and brightest in the storage industry.  Some of these folks are scary bright.  I have given out about half a box of business cards, collected a similar number, explained what we are now doing, introduced my partner around, and listened carefully to companies regarding what they need to help their businesses grow faster.  One of the most interesting topics, however, was hearing the life-cycle of a company from idea, to investment, to product, to growth, to exit in the form of an IPO, acquisition, or in some cases, closing the doors.

Several of the people with whom I spoke worked at self-funded start-ups, meaning that the company started and grew with no money from outside investors.  Importantly, each investor was actively involved in the operation of the company.  As with my partner’s previous company, each of the investors worked very hard in the early years and built profitable, growing businesses.  The companies were, consistent with the advice of Clayton Christensen in his book, The Innovator’s Solution, ”patient for growth, but impatient for profit.” Also, importantly, the founders took no salary, but paid themselves out of profits and growing equity.

The benefit of self-funding a company is that you will learn the discipline of good planning and careful money management.  If you don’t you will soon be out of business.    By the way, I am taking my own advice in my own venture.  I haven’t had a roommate at a tradeshow, since my first COMDEX show 11 years ago, but I did this past week.  You also won’t have to worry about the competing agendas of outside investors.  One principal in a venture-funded company which will remain unnamed, shared a story about how the investors, impatient for growth, pushed the company to the brink of collapse by demanding unsupportably-fast growth.

In the beginning, principals in self-funded startups typically have a shared vision: create a product or service, sell the solution, grow the company, and make a profit.  Seems pretty simple and very focused.  One of the challenges of a self-funded startup, even one that has reached profit and growth, is that a time will come when individual investors will no-longer share the common vision that enabled the initial profit and growth.  For each of the investors, their vision may become:

  • Minimize risk, while preserving the equity and profit annuity that was created in the initial years.
  • Continue to invest and grow, accepting higher risk and lower near-term profits.
  • Minimize costs, maximize profits, and prepare the company for acquisition or IPO.

My partner is an expert in the leasing business.  Leasing, as those who have studied the industry know, is a back-end business.  While there are many benefits of creating a self-funded startup, there are also many challenges.  Most of the challenges that founders invision focus on  having sufficient access to capital, creating a product, finding customers, managing costs, growing the business and delivering profit.  The challenge that is most-often ignored is how to effectively decide the future of a profitable company as the initial investors mature.