How Much Capital Your Company Needs
There comes an inevitable crossroads in the life of every company, during which a founder must determine how much capital to raise for his or her venture. This amount is determined by the objectives of the CEO and the company.
As a startup grows and attracts the attention of investors, an important decision regarding capital is placed in the hands of the founder-CEO. There are many reasons why a founder may choose to raise a smaller or larger amount of capital for the company; however, this decision has a trade-off.
If the founder chooses to raise a large amount of capital, it will result in faster growth for the company, but he or she will have lesser control of the venture. On the contrary, if the founder chooses to raise a smaller amount of capital, it will result in slower growth for the company, but he or she will have greater control of the venture.
Daniel Kahneman, a Nobel prize-winning economist, asserts that it is critical for startups to amass as much capital as possible, in order to accelerate growth and provide insurance for unexpected expenses and unfamiliar risks.
AirBnB co-founder Brian Chesky counters with an economically conservative approach. He stresses the approach of maintaining leadership and a “scrappy” work culture, exploiting existing resources to the fullest.
This philosophical dichotomy has largely defined CEO decisions. A glaring exception to this rule was Facebook, whose founder-CEO Mark Zuckerberg had not only exponentially increased the growth of his company during various rounds of funding, but also maintained leadership throughout.
At this point, the CEO might make the decision to give up complete control of the company in return for venture capital and resources, which result in faster growth. Investors gain ownership of the company, and the founder may step down. This is due to the fact that a larger company has more complexities, so the addition of more specialized management positions as well as structural changes are necessary. In this scenario, the founder is rich.
In the alternate case, the CEO refuses to give up complete control of the company at the expense of greater resources and capital. As a result, the company experiences slower growth, operating well below its potential. In this scenario, the founder-CEO is king.
It ultimately comes down to a wealth versus power decision: what is the CEO’s purpose for founding a company? Is it to amass a large amount of wealth from stepping down eventually, or is it to maintain control, even if it means the company will grow more slowly?
This choice can be aided through clear judgement of one’s intent. The decision regarding how much capital to raise is about whether you will be giving up control but growing rapidly, or preserving control but growing more slowly.
For help making decisions like rich versus king or Chesky versus Kahneman, try Finfox, a financial forecasting platform for growing startups.