As a business grows, founders are typically able to fund its operation with their own money. Ultimately, the founders will reach a point where they need to bring in outside investors in order for the business to continue to grow. The money that outside investors provide can be essential in order for the business to purchase inventory, hire employees, and expand into different geographic locations.
There are a number of trade-offs that come with bringing in outside investors. While providing investors with equity helps to raise money for the business, that equity comes with strings attached and may limit the founder’s control over the business. This can lead to conflict with the founder and the investor having different long-term visions for the business.
Additional research supports the notion that there is a direct correlation between the loss of founder control and the growth of the business. Again looking at a sample of approximately 6,000 U.S. businesses, Wasserman (2017) found that in order to increase a business’s value, founders had to allow other people to make decisions that they previously controlled. These trade-offs help to illustrate the dilemmas founders face.
I believe the goals of an investor need to line up with the goals of the founder. Investors want to increase the value of the company and get a return on their investment. Although founders want to achieve financial success, they also want to achieve a positive impact on the employees and customers of the company. Founders also want to preserve their legacy and ensure their impact continues after them. Investors need to be aware of the desires and goals of the founder in order to ensure a peaceful relationship between them.
This is particularly true for The College Closet. Initially, I would want to have as much control over the company as possible. However, if I wanted to expand to other college towns, I would need to give up some control. Raising capital would allow us to open new stores in a shorter period of time, as profits from the current store would take more time. Although an investor would want to achieve a return on their investment by helping The College Closet expand to new markets, other investors may want to alter The College Closet’s purpose, which would create a negative impact.
I would want to have an investor who had experience with the retail industry and/or expansion to help grow The College Closet. However, an investor with the aforementioned experience could also want to alter The College Closet’s purpose by bringing in new management to help achieve growth.
While investment can certainly aid a startup in its development, founders must also consider what they are giving up in the process. For example, I would want an investor who would bring more to The College Closet than just a check to help fund growth. In addition to the financial aspect, an investor who shares my philosophies and helps me define and shape the long-term plans for the business is someone I would definitely want to have on my team. Investment can help a business grow, but I would also like to protect the spirit of The College Closet and ensure that only people who are truly dedicated to the vision and purpose of the business are owners of the company.
References
Wasserman, N. (2012). The founders’ dilemmas: Anticipating and avoiding the pitfalls that can sink a startup. Princeton University Press.
Wasserman, N. (2017). The throne vs. the kingdom: Founder control and value creation in startups. Strategic Management Journal, 38(2), 255-277.