What happens when you focus on ownership?
Based on my experience with founders, here are some of the scenarios.
- You turn away early capital because you have to give up too much ownership and as a result, take longer to get development efforts funded and underway;
- You persist without skilled experts or appropriate processes because you can't afford them, and have to go back and fix it later costing a lot more time and money than doing it right the first time;
- You take as much "dumb" money as you can get because they accept a higher valuation and find yourself trapped when you need more capital because the new valuation would force a down round on your early investors (and unlike most professional investors, they can't afford to keep funding the company as an alternative);
- You turn down more established and well-connected investors because they want more ownership, and miss out on having them smooth the path for future rounds and eventual exits and introduce you to the professionals and partners needed to succeed;
- You turn down any deal that threatens your control of the company because only you know how to do this right, and miss on having professionals with far greater experience steer the company to greater success;
- You turn down strategic investors because you think it will cramp your ability to get a deal from someone else and they will try and steal your ideas;
- You take too little money to minimize dilution and fail to reach a value inflection milestone before needing more money - a sure recipe for a down round.
There are scenarios where ownership can be maintained without compromising the business. When building a lifestyle company or when early revenue will allow the company to grow without funding or when the founding team has the resources to fund the product development themselves, then ownership can be preserved and founders can enjoy all the fruits of their success or failure and total control of their destiny. While this is common for restaurants, it is seldom the case for healthcare products, either drugs or devices.
So what does a focus on execution look like?
- Have a product development plan - know what you need to do, when you need to do it and how much it will cost in time and money. If you have a plan, that will dictate the capital requirements for talent, services and materials necessary to advance the development of your product(s).
- Have a capital raise plan - this is generally taken directly from your development plan. The amount of capital you need to raise, when you need it, and what milestones will be accomplished by the next capital raise is the roadmap to future funding needs that sophisticated investors will appreciate.
- Plan for contingencies - not everything goes perfectly and if you don't have a backup including some reserve capital for delays or surprises, you will get caught short somewhere along the line and need to raise money without meeting the planned milestones - the worst circumstance to raise money in.
- Hire the team you need when you need them - for some very experienced and skilled positions, the process may require months of attention. It may be possible to bridge a gap with consultants but have a strategy to make sure you are not caught short on skilled team members.
- Push yourself and your team relentlessly to deliver the planned development steps on time and on budget.
- If changes are required, track the impact on the plan and adjust accordingly before impact. If you have enough warning, you can steer around the iceberg and your investors will understand but if you wait until the last minute, chances are you will sink.
When you plan and execute well, the capital needed with be clear and purposeful, which improves investor confidence and valuations. Part of valuations will be out of your control - market conditions and investor competition will influence the range of offers. But your ability to map out future financing needs realistically will appeal to the more sophisticated investors used to holding reserves for future rounds and hoping to see value increase along the way between financings. Done right, you give up less and less each round. And even though you own less as a percentage, the value of what a founder owns in a well-executing company will continue to rise sharply.
The payoff is not how much you own along the way but what it is worth at the exit.
So let go of ownership control and focus on controlling execution. That is a much surer path to success and the rewards that come with it.