Create a company: 5 - Raise funds or not ?

This is a question I am currently totally asking myself right now for my future company.

If you start your business and execute it well, one day will come when you will either want to look after funding or better, investors may call you.

Here are the pros and cons as I see them.

-Raising funds allow you to go faster by hiring more people, doing advertising campaigns, opening new countries, etc. -Raising funds help get you in a leadership position when your competitors do not get as much funding. -The investors on board provide you with support, ideas, constructive criticism, partnerships, etc.

Yesterday I had a meeting with one of the best entrepreneurs I know, Denis Payre, who started Business Objects and recently Kiala in Brussels. Business Objects is one of the rare French startups that managed a great international growth, a successful Nasdaq listing and thousands of satisfied clients around the globe. Launched less than three years ago, Kiala has bridged the last mile for many ecommerce and mail-order companies in Europe. It has achieved a leadership position in Europe with about 6M€ in revenues in 2003, 30 forecasted in 2004, 25 000 deliveries a day right now and about 5000 Kiala points where you can get your delivery. Basically its concept is you do not have to go to the Post anymore to get something you ordered, you can go to Kiala points such as Fuel Stations, anytime you want. Kiala has a team of 50 people in Brussels from 12 nationalities with clients such as Quelle, PPR and Otto. It even managed making great deals with La Poste and TPG, the Dutch post, who looked at Kiala as a competitor at the beginning.

Well, despite the tough environment for investing, Denis managed to raise about 20M€ in less than three years. Denis argues that of course he got dilution, but he could have never achieved a leadership position without these funds. He has less and less of his company but it is worth more and more. Of course in paper for the time being, but Business Objects transformed the paper into cash in the past so when your company is successful, exit comes one way or another.

Let's now have a look at the negative points

-Especially these days, the investment comes most of the time with preferred shares, anti-dilution clauses, full rachet and other bad news for your founder shares. Basically if you fail to sell the company at a higher price than the one they invested in plus a high interest rate (25% ?!) sometimes, your shares will just be worth nothing until they get this exit. I understand it, of course, but it is sometimes very tough for the entrepreneur and can create difficult relationships at a board level. -Having more cash can lead you to more mistakes. How many Internet startups have we seen burning way too much too fast (sometimes with the influence of the investors themselves, sometimes only because the entrepreneur just wanted to go fast and forgot the P&L). The worst thing: you wait for the next round to get refinanced and it never comes... -Spending a good share of your time managing investors relationships (Denis has 7 investors, it takes time) than creating value for your company. Because a board also comes with monthly reporting, that you need anyway, but maybe if you were alone you would not do it that detailed. -Raising a VC round means also a lot of time preparing it and closing it. It also comes with lawyer fees that can make 100s of thousands $ disappear from the cash you raise. -Usually very fast the entrepreneur loses control on the company. Talk to Denis, he does not care, he says "If they fire me it is good news because it means they have found a better CEO and my shares will get more value".

Well I agree with you Denis (start your blog by the way !), only if their judgement of what a better CEO is is the right one ! In any way the entrepreneur will always have more power, even if he lost control, just because investors do not manage the company.

So now that I have thought of pros and cons, I still think achieving a leadership position and fast growth is a good deal over tough negociations and possible control issues. So I will probably raise funds again -if investors are interested and trust me- as I did in the past.

Any other pros and cons you see ?