There’s no end to the number of startups and businesses who have done the hard yards and raised millions of dollars in funding, but less well-known are the companies and founders who turn down those same millions.
Though it’s often viewed as the ultimate mark of validation for a fast-growing business, there are times (believe it or not) when taking on millions in venture capital can actually be the wrong move, often for any number of reasons.
One such entrepreneur who knocked back a locked-in investment is Tom Szaky, the founder and chief executive officer of $18 million recycling company TerraCycle. Szaky penned a piece for Entrepreneur earlier this year, running through why his company turned down a $1 million investment during its early days, despite having just $500 in the bank.
The company had competed at a local pitching competition, where the grand prize was $1 million. To his surprise, Szaky won the competition, which led to a whirlwind of attention for the business.
“But, in the following weeks, the investors’ lack of interest in the environmental aspects of converting garbage into vermicompost remained,” he wrote.
“It was the opportunity in organic fertilizer that was their carrot, and when it came time to get down to it, the plans for investment became clear: I would be the public face of the company, but they would bring in their own team to replace the entire staff, as well as the garbage side of the business. They told me I’d be rich.”
Seeing the extensive strings attached, Szaky says he turned down the significant investment, deciding instead to keep the staff on board who he’d built the company with and make money the “old fashioned way” by selling a product. In the end, the process worked out for the company, which later got a capital injection which helped it scale.
“As you start up, a venture capital investment may seem like a dream come true, but consider the ways it is worth it to retain control of your business and grow it by other means,” Szaky says.
Raising money “puts a time frame on your existence”
It was a similar story for the chief executive of software company Basecamp Jason Fried, who told CNBC last year he’s turned down over 100 offers for venture capital investment over the company’s 18-year history, saying doing so was “setting a time-frame on your existence”.
“Basically, when you take other people’s money you owe them something,” Fried told CNBC.
“You either owe them money back or a business decision that is kind of no longer yours. Often that means selling the business or being acquired and being run by someone else, and we don’t ever want to do that.”
Fried claims that venture capitalists aren’t interested in businesses actually continuing to scale and grow, instead being interested in the business “raising more money so they can eventually sell”.
Raising money has become an integral part of startups and young businesses, Fried says, but he thinks it doesn’t have to be like that.
“Young kids get in these [accelerators] because they are looking for help, which is cool,” he says. “But these accelerators are all about fundraising, and they have demo days and this whole track of raising money becomes a part of their business — and it just doesn’t have to be,” he added.