Startups need to bootstrap, says Freelancer CEO Matt Barrie. If they can.
He means use alternate sources of funding than direct investment, such as self-funding, getting grants, debt factoring, or even borrowing.
Most startups lose control of their companies the moment they take money from a venture capitalist, Barrie told the crowd assembled at the SydStart conference.
Barrie points out that many founders don’t understand all of the processes and documentation that go into investment, and investors can capitalise on this information asymmetry.
Outside investors can take outsized proportions of the equity or end up controlling the board, and once a founder loses control of the board, they have lost control of the company.
Further, the way the deals are structured, investors can really clean up when a company IPOs, taking a cut before the funds are divided, and then taking another cut because of the shares they own.
Barrie specifically cited Box.com’s Aaron Levie, who ended up with just 3.4% of Box.com by the time it IPO’d.
“Aaron’s done a phenomenal job of building a world class company, but would have owned significantly more at IPO if he hadn’t taken so many rounds,” Barrie said.
There were also provisions in one of the Box.com capital raisings that put pressure on the company to IPO, perhaps prematurely. Called a “ratchet”, it meant that those who had invested in the company at series F saw their shares gain $3 in value every 365 days, if the company had not gone to IPO by July 7, 2015.
Remember, Barrie says, the golden rule of venture capital is “last in, first out”.
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