Recently I spoke with an entrepreneur who had built a nice business the old fashioned way: he bootstrapped $100,000 into a fantastic business doing $1.5mm in ARR and growing 70% year over year. The CEO/entrepreneur owned 80% of the stock with the remaining 20% owned by silent, non-active friends and family. The business is based in Charleston which isn’t exactly a hotbed of VC activity, so the CEO had to build a real business that was profitable from day 1, growing responsibly by only taking on customers where the economics were profitable.
I reached out to the Company and the timing was good: the CEO was thinking about taking on $1.8mm (far more money than the business had ever had) to accelerate growth and go for a big exit down the road. We spent a lot of time with the Company, built them a financial model from scratch, and ultimately provided a term sheet. In the end though, the fit wasn’t right and we convinced the entrepreneur not to take our money or anyone else’s for that matter.
At DAN Fund, we never want to push an entrepreneur to take our money. We want you to want it, badly. The CEO of this business thought he wanted the money, until we outlined what the money would come with: a 5 man board (2 investors, the CEO, the CEO’s 1st pick, and an independent) whereby he could get outvoted on major initiatives or even fired, controls around executive salaries and debt incurrence among other things, and a shortened timeline to exit which in this case was 3 to 4 years. Once we had explained these things in detail, the CEO realized the money wasn’t worth the growth and the headache (no matter how much value a VC tells you they’re going to add, investors are a headache). He enjoyed running the business autonomously, his timeline to exit was more like 8 to 10 years, and ultimately flexibility was worth more to him than capital.
We parted ways as friends because it’s in nobody’s best interest for us to make an investment and then for the CEO to have buyer’s remorse about it. If you’re profitable and growing, I would implore you to think long and hard about taking on capital. Growth capital is great, but only if you really want it and are prepared to take on the burdens that comes with it.