When the fear of dilution (or desire to keep control) makes you a failure

Over the past two years, I have seen a numerous number of business plans, new startups and startups that have been startups for too many years. It is always surprising the see so many entrepreneurs concerned about majority control and the fear of being diluted in an upcoming round of funding. I actually believe that too many of them end up dying or selling too early for lack of proper financial support; mostly driven by this fear.

You lose control the second you need money – no matter how much

If you want to make sure you never lose control, you better have a business that never needs any form of bank loan or third party investment. No matter how little you need, you will virtually lose control of the business. Maybe not on paper, but as soon as your business will be in trouble, you will have to deal with your banker or group of investors. You want absolute control? You should never ask for money. Then again, your business better be highly profitable and cash strong to handle your growth, otherwise you will inevitably run out of money.

Keeping control, no matter how much you own

Instead of focusing on your ownership of the business and who has majority control of the business, concentrate your efforts in building a realistic business plan and spend your time on making it happen. No investors want to change a winning combination (well unless you have a serious personality clash with them – and that’s a whole other discussion). If your business is hitting the key milestones and is providing the value/ROI your investors are looking for, then you will be in charge and your Board and shareholders will let you do your job.

When was a very successful business been ever over capitalized?

It is funny to see so many discussions about the valuation of Facebook, Twitter, Groupon and other companies lately. People are spending all their time wondering about what valuation multiples are being applied. The resulting effect is very much like the dot com bubble where people worry about valuation (and ultimately the dilution that would occur for a round of funding). Startups worry too much about what they are worth instead of looking at how much they really need for run the business. Focus on the money you can get and what it will give you. At the end, I don’t recall a company where the executive team does not get properly rewarded upon being highly successful.

Get as much money as you can and make your business grow

Entrepreneurs should not think about how little they need in order to un-dilute themselves. Think instead of what that extra million dollars would allow you to do. Could you accelerate your product development? Could you expand faster in international markets? Could you acquire other business that complements your solution? Again, I am more curious to see what Facebook will do with the latest 1.5B$ of funding. The game is about building a long term sustainable and growing business. No matter how much we talk about the price of gas, you would never drive for a long distance without doing a proper fill up of your gas tank. Who is in sane mind drives a car and fills up for a few gallons/liters every couple of miles/kilometers? Getting funding should not be different.

So if you are thinking about raising more funds, focus on creating value, don’t think about the valuation, how much you are getting diluted (well, just make sure you are not getting screwed…) and build the right plan to wisely spend that money. If you are truly successful as your business plan says, there will be plenty of money (and ROI) for everyone …