February 16th, 2012 → 10:24 am @ Norman // No Comments
Often technology entrepreneurs can choose between attempting to build a larger business, probably requiring external capital and a significant team of people, or focusing on a smaller opportunity which is easily controlled but typically has less upside. I was reminded of this recently when a software developer came to visit me. He’d enjoyed a successful exit after a typically agonising company-building process, and had done the usual post-exit activities (paid the mortgage off, traveled, bought a nice car, and chilled out). Now he was ready to go again.
I enjoyed talking with him. I meet a lot of people who talk about building technology companies, but few who have had recent, successful exits. It wasn’t a huge success, but enough to give him a modest amount of investment capital, and confidence that he could do it again.
I suggested he put half his capital in low-risk investments, some into his next company, and some spread across other start-ups. That way he’d be starting to build a portfolio of investee companies and secure capital while he worked on his next project and, even if his next project failed, he’d still be financially comfortable and have potential upside.
We also discussed the size of project he should get involved with. It takes as much effort and time to build a modest opportunity to a $10 million sale as it takes to build a good opportunity to a $100 million sale, and it’s easier to attract investors to a larger opportunity. He wasn’t so sure. He’d done okay in his last project and he could now afford to be a bigger player in his next one… perhaps double or treble his return… a tempting idea.
But his approach didn’t account for the risk. To be the major funder and founder of a new startup would risk a lot of capital, and he couldn’t guarantee another success. Having 50% of a potentially $10 million business is not the same as having 5% of a potentially $100 million business. He’d have more control of the smaller business but is that what a software developer really wants? He’d be better to be part of a team including entrepreneurs, sales people, and operations people who were motivated by a big goal. As well as bringing a more rounded team, the larger company is less likely to fall over if the going gets tough… even if the initial launch fails it’s likely to be worthwhile to fix the problems. And, if the company is wildly successful, the upside on a larger opportunity is likely to be greater.
Our perspectives were quite different. He was concerned about control, as he’d had trouble with bad business partners. I was concerned about minimising the risk of failure, and maximising any possible upside. Relying on a software developer who owns half the business, and would rather have the business remain small than bring in investors is too risky for me. I’ve seen a number of startup founders net a couple of million dollars on their first company, then blow most of it on the next couple of attempts. I’d rather work with those who use the knowledge and credibility they’ve gained to chase a larger target at lower financial risk, than those who keep rolling the dice on small start-ups.
Tags: behavior, entrepreneur, serial entrepreneur, software developer, startup
