Not Raising Money And Never Going Public Is The Happier Path

When you start a startup, fundraising is probably the thing that torments you most in the early stage.

“So-and-so raised ¥XXX million through a third-party allotment of new shares from XX.”

Saying something like that sounds cool. It really does.

But you’re better off not taking investment at all.

You might think “come on, are you an idiot,” but that’s the truth.

Absolute fact number one.

There are several points here, so let’s go through them.

Taking investment is like marriage. No, sometimes it’s even more brutal

Taking investment is like a marriage where polygamy is allowed. Calling it a shared destiny sounds cool, but it also comes with responsibility toward the family, the need to devote time to the household, and the obligation to listen sincerely to your wife’s requests if you want domestic harmony. But if the wife is heading in the wrong direction, you have to point it out; you can’t just let things slide. You end up taking on, in full, all the hurdles, troubles, and commotion that happen in an ordinary household. Someone else’s household, no less. Lol.

This takes a fair amount of nerve, but depending on the situation, it can lead to a wonderful encounter, or a happy, harmonious future. That’s if you pick out the good parts. Pick out the bad parts, and what the other side does “for your own good” can be an unwelcome kindness, or it can act as a brake “for your own good,” or in some cases it can wind up liquidating your company “for your own good.” Lol.

Communication between spouses matters. You have to align on direction, make clear what’s negotiable and what isn’t, and always trust each other and move forward hand in hand. It’s a genuinely difficult thing.

And divorce isn’t easy.

Handing over shares is like shaving years off your life

“If you had to compare shares to something, they’re the company’s life” — that’s probably what most executives would say.

You have to protect them, but if you don’t bet your life, life won’t open up for you. That’s probably what everyone thinks.

Shares carry various rights depending on their type and ratio. An easy example is a “veto right” over resolutions — a situation where a major resolution can’t pass without securing that person’s approval. There’s also “voting rights,” the right to participate in resolutions, though their influence depends on the shareholding ratio. There’s also the “right to propose resolutions.” Get into finer details, and there’s the difference between someone who has “the right to attend board meetings” and someone who only has “the right to read the board meeting minutes.” Authority within a company is defined by shares, and the company is run based on that. That’s what a “corporation” is.

Conversely, there’s also an “obligation to prepare consolidated financial statements,” but I’ll leave that to specialized books.

At the time a company is founded, the founder holds all the shares. As the company takes on investment, that ratio gradually shrinks; up to 51% it’s still the founder’s owner-company, but after going through a certain number of rounds, it drops below 50%. Once there’s no longer anyone holding a majority stake —

that’s exactly when politics is born.

In the first round, the founder probably still holds most of the shares. But that means the founder has decided to step onto that path. Unless you’re prepared to eventually fight and win on your own political stage under your own strategy, you can’t hand over shares.

Well, I’ve written some ominous-sounding things, but essentially this also means “if the risk is worth it, go ahead and take the investment.”

One piece of criticism: in a scene like “won a contest and got a few million yen in investment,” handing over 20% or 30% of your shares is the height of folly. It’s like someone drowning in debt borrowing money from a loan shark against their own organs just to cover the interest on a current loan. If you’re pushed to the point where your life is on the line tomorrow or the day after, that might be a different story, but starting a company is, at minimum, not that kind of situation. Watch out for selling cheap.

For anyone who’s followed the logic this far, there’s nothing more to say about IPOs. The story is exactly the same. And compared to taking investment, with an IPO your marriage partner becomes “an unspecified, unlimited number of people.” That’s a tremendously large risk.

To IPO or not to IPO?

So why does everyone IPO? There are two reasons. One is:

“Because raising funds through any means other than an IPO has become difficult.”

There are several possible reasons why things end up this way. A wonderful reason, one that’s common in Silicon Valley, is:

“The company has grown so large that nobody can invest in it anymore.”

For example, once a company reaches the scale of pre-IPO Facebook, even if you invested tens of billions of yen, you still wouldn’t get your hands on even 1% of the shares. For the investing side, there’s basically no longer any benefit to investing in such a company. And on Facebook’s side, being handed just tens of billions of yen isn’t going to help much either, so if they’re going to take money, they want much more. At that point the amount becomes something nobody can invest. So then there’s nothing left but to IPO. That’s a very healthy case.

So is fundraising really necessary?

That’s a question worth asking sincerely. For a reasonably mature company, in most cases the answer is probably no. If you need funds for immediate needs, borrowing is generally preferable. For a company with some track record, that shouldn’t be a problem. For an early-stage company, there are options like grants instead. If you’re aiming for a major business pivot and need large-scale funding for it, you should first consider selling off part of the business. Someone who wants the convenient option of keeping both isn’t cut out to receive risk capital in the first place.

So why IPO even in such cases? That’s the other reason:

EXIT.

There’s more nuance and structure to the definition of EXIT, but what I mean here is essentially that founders and early-stage shareholders sell off their shares. As I said earlier, shares are equivalent to life itself. Selling them off, to put it kindly, is a departure toward the next phase; to put it unkindly, it means the founder no longer has any attachment to that company. What’s commonly called an “IPO goal” is exactly that. I won’t deny this feeling at all. Starting a company and running an early-stage company is no ordinary hardship. You reach the goal after being on the verge of giving up countless times, feeling reckless countless times, wanting to just quit countless times. It’s only natural to feel that it’s okay to finally relax. And the company gets reorganized once, and heads toward its next phase. Whether it survives that can’t be judged from its pre-IPO state, because by then it’s already a different company.

Naturally, there are cases where that doesn’t happen. There are cases where the founder and other major shareholders barely let go of any shares at the time of the IPO, so the management environment isn’t affected. Or there are cases where the founder didn’t originally hold much of a stake to begin with, but continues to reign thanks to overwhelming charisma and trust. Incidentally, the “company grew too large” case mentioned earlier often falls into the latter category. Which, when you think about it, is only natural.

Depending on the pattern, the decision to IPO is extremely difficult. Plenty of companies start sinking after an IPO. So if your own company is in a healthy state — “business is doing well and we can fund forward investment out of our own surplus” — then there’s basically no need to even think about an IPO.

IPO as a goal certainly exists. But does it lead the company toward sustained growth, or does it end up acting as a brake? An IPO is not a sufficient condition for the company, or for you, to become happy.

Let’s think about the other party’s feelings

But…

Let’s go back to the marriage analogy. What does the marriage partner think? Investment is carried out by weighing the sum — no, the product, no, the least common multiple — of various intentions. The intention, naturally, at the top, is capital gains. If I start listing other intentions there’s no end to it, so I’ll skip that. How do you obtain capital gains? By selling shares. How do you sell shares? Unlisted shares aren’t something you can just sell off freely, whenever you like. Naturally, based on the proper procedures and proper consents… which means “a sufficiently good reason to sell” is normally required. Now, thought through simply, reasons like “I no longer find this company’s business appealing so I want to step away” or “our fund’s term is approaching so we want to liquidate here and part ways” — honestly, these aren’t cool stories. Not everyone ends up happy.

When it comes to trading unlisted shares, a common example is an MBO, but an MBO’s basic purpose is usually “capital separation from a large corporation, holding company, etc.,” so that’s a bit different from what we’re discussing here.

So the marriage partner’s feelings are, “Could you please EXIT around 5 or 6 years after founding, please…”

Even if the wife said “one child is enough,” she might see young siblings happily playing together at the park and end up wanting one more after all. Even if the husband says “I always put family first,” he might secretly want to get drunk with coworkers once in a while and throw up on the platform at Shimbashi Station. Well, you have to be sensitive to that sort of thing.

That was a bit of a digression, but a VC’s mission, on the outside, is to buy a company’s shares cheaply, grow them, and sell them off for profit, but the people inside don’t think of it that way, nor do they say so. They do their work feeling the social significance of properly circulating financial assets by helping people who are opening up new business frontiers. That tension sometimes shows through, and of course there are VCs who don’t bother hiding it depending on the case. I heard about a friend’s past startup: about a month after receiving seed funding (a few tens of millions of yen) from a certain Singapore-based VC, they were asked with a completely straight face, “So, when’s the IPO?” and were shocked.

So once you’re married, you can’t decide the number of children by your own will alone, and you’d better properly discuss with your spouse when it’s okay to go out drinking and when it isn’t. That’s the kind of thing this is.

In the first place, though,

I think the motivation for becoming a startup CEO, or getting involved in running a startup, differs from person to person.

But what’s commonly at the base is the desire to realize a feeling like “if it were me, I’d do it this way,” “if it were me, I think this would sell in this field,” “if it were me, I’d build an organization like this.” It’s just that the shape of that “feeling” differs from person to person.

“If it were me, I’d change the world like this” —

maybe that could be summed up in a single line like that. Needless to say, choosing partners is extremely important for realizing it. Co-founders, launch-phase members, executives, engineers, partner companies, advisors, and, of course, VCs and investors.

You want to find someone you can respect, someone who can share your vision. If you’re unlucky enough not to meet such a person, there’s no option of just settling for whoever happens to be around, is there?

Does a startup fly while carrying the burden of investment? Does an IPO become a stepping stone toward becoming a large corporation?

You hear all sorts of good marriage stories in all sorts of places. “So-and-so is the lead on our seed round, but they never interfere with our decision-making at all, which really helps. On top of that, they’ve said they want to join the next round too. We’ve built a relationship of trust.” “When we launched, we didn’t have anyone with hardware know-how on the team, but after taking investment from so-and-so, they connected us with their network, and as a result we were able to find a good EMS.” “If so-and-so hadn’t joined us, the IPO honestly would have been impossible. Their know-how is amazing.” And so on.

Marriage is a natural part of life, and it has both good and bad. That’s why everyone does it. But there’s one decisive difference between a company’s investment relationships and human marriage:

“Even without a marriage partner (an investment partner), you can still have a child (a product).”

That’s it.

Anyone who thought “isn’t that the same for humans too?” might be French. Lol.

Actually, this is a good point — common-law marriage is so prevalent in France, and in Western countries generally, precisely because you can receive sufficient social security through a common-law marriage without formally marrying at all. The ease of working for a single mother with children is also on a completely different level compared to Japan.

In other words, “if social support (financial breathing room, people, and technology) is sufficient, you can make a child (a product) without marriage (investment) at all.”

It’s an obvious thing.

Why state something so obvious deliberately?

To avoid the tunnel vision that comes from thinking with “investment” as a given premise.

Let me add one more obvious thing at the end.

A business started with one’s own funds hits, hits big, and quickly becomes profitable. Run it for a year, and the surplus funds generated let you branch into a new business, which is another hit. Keep repeating this, and before you know it you’ve become one of the world’s leading large corporations — but you never IPO’d, because, well, there’s simply no benefit to it.

Needless to say, this is the highest form of success. In other words, being without either investment or an IPO is the happier state. That’s the absolute fact.

Originally published in Japanese at https://clazytech.com/2017/05/428/. Translated with LLM assistance and reviewed before publication.