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Funding

Elephant or ant? Being “equity precious” in your small business can hinder its growth (and your pocket).

Being equity precious when growing your small businessHere is one of my favourite quotes when it comes to strategy for small business. It beautifully sums up the quandary many entrepreneurs fall in to early in their business career, under the curse of being “equity precious”:

It is better to have the tail of an elephant than the body of an ant.

Or, another common way this is put is – “it is better to have 25% of something, than 100% of nothing.”

For me, this quote is a painful reminder of the tech wreck.

I started a gift e-tailer online on 1 December 1999 (my business partner had 2 large gift stores in Melbourne and more than 30 years experience in the industry – I brought the “e” to our e-tailing).

About 2 months earlier, in October, a friend started a developer community website (from his bedroom, on his own). I had interest and offers to be bought out (in part of full) in the first 6-12 months of launch, but was stubbornly emotionally tied to my business and couldn’t see what were actually good offers.

My friend (within 3 months of launching) had sold his internet company to NASDAQ listed internet.com for more than $1m…

Granted, the business models were different – his set to scale much much faster than mine – but the point remains: at that time, people were over-paying for internet companies.

When I asked him what was his next business he was going to start or invest in, he said:

Oh, I’m not an entrepreneur, like you. I was just in the right place at the right time and knew a good deal when I saw it. And, took it.

“And, took it”. Those words still haunt me and the many alumni from the tech boom.

My friend took the emotion out of it. He sought objective, impartial professional advice who all said “sell”. Then he acted on it.

For many growing small businesses, unless you have a product or service that is a proven cash cow (like ads are to Google for example), your small business will have a ferocious appetite for funds, for cash.

At all times, the sensible entrepreneur will measure their growth ambitions with the cash they have available (even a little less, for a buffer).

But for some – or some businesses in the prime seat for growth – carving off some of your babys’ equity to an investor is wise.

When should you sell some of your shares or equity in your growing small business?

For a lot of small businesses with fast growth it is somewhere between never and soon(ish). It will always be a judgement call by the entrepreneur of when and how much equity (the ant) you give up now, for a smaller slice of a larger pie (the elephant). One of the worst things you can do is get emotional amount the decision. The smartest thing you can do is take objective advice from people you trust, look at the numbers and make a decision.

Sometimes a funding path that makes sense for a growing small business is to sell some equity. Move from having “the ant”, in exchange for “the tail” of something much larger – the elephant. Each business and situation is different, of course, but at least be more open-minded to the idea than I was in one of my first businesses.

What a small business owner/manager can do when selling some equity in their business:

  1. Leave it to the absolute last minute to sell-off any of your growing business, but at the same time, know when the time is right – will more cash into the business now propel it to an elephant?
  2. Easier said than done, but take the emotion out of it. Be rational and objective
  3. Understand how small businesses are valued, so you know if you have a good offer or not
  4. Get independent advice, particularly from people not involved in the business
  5. Do your due diligence on the investor(s), your soon-to-be business partner(s):
    1. Are they as wealthy and cashed-up as they say?
    2. Have they treated other investees well in the part?
    3. Are their exit criteria close to yours (when, how, to whom and for what return)?
    4. Will they add more to the deal than just cash – contacts or advice for example?

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