No investment and no IPO is the happier path, absolutely

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

Something like “Company XX raised $ZZ million through a third-party allocation of shares from company YY.”

That sounds cool. It really does.

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

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

Absolute fact number one.

There are a few points to this, so let me lay them out.

Taking investment is marriage. No, sometimes it’s harsher than that

Taking investment is like a marriage where polygamy is allowed. Calling it a shared destiny sounds cool, but responsibilities to the family arise, time has to be devoted to the household, and unless you sincerely listen to your wife’s wishes the home won’t stay harmonious. But if the wife is heading in the wrong direction, you have to point it out — letting things slide isn’t good either. You end up shouldering all of this: the hurdles, the trouble, the noise that occurs in an ordinary household. With some other guy’s old man involved. (laughs)

This takes a fair amount of nerve, but depending on the case there can be a wonderful encounter, a happy and harmonious future. That’s if you focus on the good parts. If you focus on the bad parts, what the other side does thinking “this is for your own good” can turn into an unwelcome kindness, or a brake pedal pressed down “for your own good,” or in some cases the company gets liquidated, again “for your own good.” (laughs)

Communication between spouses matters. You have to align direction, make clear what can be compromised and what can’t, and always trust each other and move forward hand in hand. It’s genuinely hard work.

And divorce isn’t easy.

Handing over shares is like shaving off your life

Ask most executives to compare stock to something, and they’d probably say it’s the company’s life.

You have to protect it, but unless you bet your life, your life won’t open up. That’s probably how everyone feels.

Shares carry various rights depending on their type and ratio. An easy example is “veto power” 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 its weight depends on the share ratio. There’s also “the right to bring forward a resolution.” To get into finer detail, some people hold “the right to attend board meetings” while others hold only “the right to read the board minutes.” Authority within the company is defined by shares, and the company is run based on that. That’s what a “stock company” is.

Conversely, there are also things like “the obligation to be included in consolidated accounting,” but I’ll leave that to specialist books.

At the time a company is founded, the founder holds all the shares. As the company takes on investment, the ratio gradually falls; up to 51% it’s still the founder’s owner-company, but once it goes through a certain number of rounds, that falls below 50%. Once no single person holds a majority,

politics is born right there.

In the first round the founder will still hold most of the shares. But that means the decision to enter that path has already been made. Unless you’re prepared to eventually fight and win on each of your own political stages with your own strategy, you shouldn’t transfer shares.

Well, I’ve written some dangerous-sounding things, but the point is also this: if it’s worth that much risk, then go ahead and take the investment.

One piece of harsh advice: handing over 20% or 30% of your shares in a scene like “won first prize in a contest, got a few million dollars in investment” is the height of folly. It’s like someone drowning in debt borrowing money from a loan shark against their own organs just to pay the interest on a short-term loan. Maybe it’s a different story if you’re pushed to the point where your life will be taken tomorrow or the day after, but at least startup founding doesn’t fall into that category. Watch out for selling cheap.

For anyone who’s understood the logic up to this point, there’s nothing left to say about IPOs. The story is exactly the same. And compared to taking investment, with an IPO your marriage partner becomes “an unspecified large number of people.” It’s an outrageously large risk.

IPO or not?

So why does everyone IPO? Two reasons. One is,

“because raising funds any other way has become difficult.”

There are a few possible reasons this situation arises. The admirable 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 investing tens of billions of yen wouldn’t get you even 1% of the stock. For the investing side, there’s basically no merit left in investing in a company like that. And Facebook’s side doesn’t want to just receive tens of billions either — if they’re going to receive money, they want more. At that point the amount becomes so large nobody can invest. So then it has to be an IPO. It’s a genuinely healthy case.

So is fundraising really necessary?

That’s something you need to think about sincerely. For a company that’s matured to some degree, in most cases the answer is probably no. If you need cash on hand, borrowing is generally preferable. For a company with some track record, that shouldn’t be a problem. Conversely, for an early-stage company, there are options like grants. If you’re aiming for a major pivot in the business and need large-scale funding for it, you should first consider selling off part of the business. Anyone who wants the convenient outcome of keeping both isn’t suited to taking on risk capital in the first place.

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

EXIT.

The definition of EXIT carries more meanings and framings than this, but what I mean here is basically that founders and early shareholders sell off their shares. As I said earlier, shares are equal to life. Selling them off means, to put it kindly, setting off on the next phase, and to put it unkindly, the founder no longer has any lingering attachment to the company. What’s commonly called a “listing as the goal” is exactly this. I don’t deny this feeling at all. Neither founding a company nor running an early-stage company is ordinary hardship. It’s a goal reached after nearly breaking down countless times, giving in to despair countless times, wanting to just quit right now countless times. It’s perfectly reasonable to feel you deserve some ease at last. And the company gets reorganized once and heads toward its next phase. Whether it survives that can’t be judged from how it was before listing, because by then it’s already a different company.

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

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

An IPO as a goal certainly exists. But whether it leads the company to sustained growth, or whether it becomes a brake instead — 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 from earlier. 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, of course, at the top is capital gains. If I start listing other intentions there’s no end to it, so I’ll skip that. What do you need to do to get capital gains? Sell the stock. What do you need to do to sell the stock? Unlisted shares aren’t something you can just sell off freely whenever you like. Naturally, based on the proper procedures and the proper consent — which usually means you need a sufficiently good reason to sell. Now, thinking simply, reasons like “I no longer find this company’s business appealing so I want to withdraw” or “our fund’s term is approaching so we want to liquidate here and be done with it” — well, honestly, that’s not a cool story. Not everyone ends up happy.

Speaking of unlisted share transactions, an MBO is a common example, but an MBO’s purpose in most cases is basically capital separation from a large corporation or holding company, so that’s a bit different from what we’re discussing here.

So the marriage partner’s true feeling is, “Could you please EXIT around the 5- or 6-year mark after founding…?”

Even if the wife said “one child is enough,” she might see young siblings happily playing in the park and think she wants one more after all. The husband might say “I always put family first” while secretly wanting to go out drinking with coworkers once in a while and maybe throw up on the platform at Shimbashi Station. Well, you have to sense that kind of thing.

A bit of a digression, but the mission of a VC, seen from outside, is to buy a company’s stock cheap, grow it, sell it off, and make money — but the people inside don’t think of it that way, and they don’t say it that way either. They do their work feeling the social significance of properly circulating financial assets by helping the people who are opening up new business territories. That dilemma sometimes shows through, and of course some VCs don’t even bother to hide it. I heard about a friend who, in a startup he ran in the past, was asked with a completely straight face “so, when’s the IPO?” about a month after receiving seed funding (tens of millions of yen) from a certain Singapore-based VC, and was shocked.

So once you’re married, you can’t decide the number of children by your will alone, and it’s probably best for the couple to properly discuss when it’s okay to go drinking and when it’s not. That’s the kind of thing this is.

In the first place, you know,

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

But what’s commonly at the base, I think, is the desire to realize thoughts like “this is how I’d do it,” “I think this would sell in this field if it were me,” “this is the kind of organization I’d build.” It’s just that the shape of that “thought” differs by person.

“This is how I’d change the world” —

maybe if you put it into words, it can all be summed up in one line. Needless to say, choosing partners is extremely important for realizing that. Co-founders, founding members, executives, engineers, partner companies, advisors, and then, VCs and investors.

You want to find someone you can respect, someone you can share that vision with. If you’re unlucky enough not to meet such a person, there’s no option to just settle for whoever happens to be around, right?

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

You hear all kinds of good-marriage stories in all kinds of places. “Company XX is the lead on our seed round but doesn’t interfere with our decision-making at all, which really helps. On top of that, they’ve said they want in on the next round too. We’ve built a relationship of trust.” “When we started up, we didn’t have anyone on the team with hardware know-how, but taking investment from XX gave us access to their network, and as a result we managed to find a good EMS.” “If XX hadn’t come in, our IPO really wouldn’t have been possible. Their know-how is amazing.” And so on.

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

“The child (the product) can come into being without the marriage partner (the investor).”

If you thought “isn’t that true of humans too?”, you might be French. (laughs)

Actually this is a good point. The reason common-law marriage is so widespread in France (and not only France, but Western countries generally) is that you can receive sufficient social security through common-law marriage without formally marrying at all. How easy it is for a single mother with a child to work is also on a completely different level from Japan.

In other words: if social support (financial slack, talent, technology) is sufficient, the child (the product) can be made without marriage (investment) at all.

It’s an obvious thing.

Why state something so obvious deliberately?

It’s to avoid the tunnel vision that comes from thinking with “investment as a given.”

Let me add one more obvious thing at the end.

A business started with your own funds hits it big, hits it big, and quickly becomes a profitable company. Run it for a year, and with the surplus funds generated you branch into a new business, which becomes 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 there’s simply no merit in it.

Needless to say, this is the highest form of success. In other words, it’s happier with neither investment nor an IPO. That’s an absolute fact.

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