Friday, November 1, 2013

Tax Attorney Joe B Garza Discusses Self-Financing in Entrepreneurship

The New York Times featured a story in June that described the different paths two entrepreneurs took to building their respective businesses. Roman Stanek, who had already built several successful businesses that provided him with a substantial net worth, founded a San Francisco-based data analytics company, Good Data. Stanek sought venture capital investors early in Good Data’s existence (obtaining over $50 million from them), believing that such a large upfront investment was necessary in light of his goal for Good Data to provide services to established companies with vast numbers of customers. Estimates say that Good Data now generates at least $4 million in annual revenue, but Stanek’s goal is for the company to be worth $1 billion.

While Robert Moore also started a data analytics company, he did so with the vision of working with small and mid-size businesses. Moore was content to grow his company, RJMetrics, relatively slowly. Financing from the outside (first from his pleased customers, and later from a venture capital firm) was not obtained until the business was more than three years old.

The state of each business reflects its respective founder’s choice. Each company has bright prospects, but differ considerably from each other. Good Data has about 250 employees, half of whom work in the company’s marketing department. In contrast, RJMetrics has a staff about one tenth the size. It had revenue of about $1 million in 2011, and doubled that figure in 2012. Neither Stanek nor Moore revealed their specific ownership percentages to the New York Times, but Stanek admits to holding less than a majority interest. Moore says the founders’ percentage is “atypically high” compared to similar firms and that employees and founders collectively own more than 80 percent of of RJMetrics.

The dilemma facing entrepreneurs is obvious: financing early in a company’s existence increases the potential for growth, but their equity in, and control of, the company is greatly diluted. Venture capital investors usually obtain a great deal of voting power and a considerable stake in the venture’s profits. Many venture capital investors demand that the venture capital investors have a seat(s) on the startup’s board of directors or other governing body. In addition, investors often demand a preferred dividend that is cumulative. If the startup is not successful for, say ten years, the accumulated dividends owed to investors may leave little or nothing for the founder and employees, even if the startup is worth millions at that time.

Read More: (A) About Joe B Garza (B) About Finance