9 Principles Of Solid Businesses – 4. Protect Your Equity

Why did you start your business? Business owners start their businesses for a whole host of reasons. I have come across people who have started their business when they:

  • thought they could do better on their own, rather than stay with their employer;
  • were made redundant and rather than go back into employment they took a risk and went on their own;
  • had an idea to make or do something new and different. A new niche or market encouraged them to take a risk.

For many business owners, that initial reason for starting up is wrapped up with a sense of having more freedom. That could be freedom to make their own decisions, take their own risks. Equally it could be the freedom to work where and when it suits their lifestyles.

Typical Business Owners

Unfortunately, for far too many business owners, that freedom doesn’t come in big measures. That work / life balance is always round the next corner. There’s never enough money to buy free time. The business demands more time and effort than expected. That freedom to make decisions turns out to be regularly reacting to problems that seem to get in the way of growing the business.

And that probably describes the world for many business owners, call them ‘typical owners’. Especially with COVID and a recession, they are aspiring just to survive.

Value Builder Owners

But there are some business owners who aspire for more. The research done by the folk at The Value Builder System, shows there are owners, let’s call them ‘value builders’, who apply 9 principles of business that build solid companies and personal wealth.  Over my next few blogs I’m looking at those principles in greater detail.

Principle 4: Protect your equity

Value Builders guard their equity like a greedy child hoarding a bag of sweets. Rather than selling their friends and family cheap shares or chasing a venture capital investment, Value Builders use other forms of financing to start and grow their business, often only offering equity as a last resort.

Rather than thinking of your shares as currency to help you grow or make employees feel like owners, consider your equity as the essential ingredient to building value. Rather than pursuing institutional investors, Value Builders often bootstrap their business and frequently use their customers to fund their growth. If they do seek outside funding, it is more likely that they are being courted by investors and can therefore set their terms rather than the other way around.

You don’t have to seek out external funding to be successful. The owner who solicits consecutive rounds of outside capital often becomes famous in the short term but often at the expense of their wealth over the long run.

Value Builders use other forms of financing to start and grow their business, often only offering equity as a last resort.

Customers Funding Growth

You will remember Matt Driver from a recent blog. Matt worked for Wakefield Council delivering and managing the Council’s IT services for schools. Mint IT evolved from the delegation of budgets from local government to individual school headteachers. Matt began providing IT services to several primary schools in Wakefield and has now grown to service over 70 schools in Wakefield, Kirklees, Doncaster and Calderdale.

Matt has not diluted his equity or sought external funding to grow his business. He has used customer receipts to fund his growth. Schools sign up for multi-year service contracts and pay in advance for each year. That means Matt can pay for new staff, training, marketing and investment in the business at a time that suits him.

Customer and Suppliers Funding Growth

David Hauser has been an entrepreneur for most of his life. He had several small money-making ventures in high school and studied entrepreneurship at Babson College. He started a web design business after graduation, followed by an internet advertising company.

Through his early experiences in entrepreneurship, Hauser discovered that one of the most frustrating parts of starting and growing a small business was acquiring a phone system. Back in the late 1990s, big companies used a PBX system to route calls throughout a switchboard, but a PBX system was prohibitively expensive for most small companies to acquire and maintain.

Hauser and his friend Siamak Taghaddos imagined a “virtual PBX” that allowed small business owners to leverage the internet to create a phone system without having to buy any of the hardware. They built a crude version of the technology, named their new company GotVMail (later rebranded as Grasshopper), and launched in 2003.

By 2004 they had acquired their first few customers and could see that to grow, they would need to buy servers and a lot of advertising to drive demand. The venture capital markets were starting to thaw after the dot com bust of 2001, but Hauser chose not to raise venture capital even though an injection of outside money would have put Hauser and Taghaddos on the map and given them the capital they needed to become industry leaders overnight. Instead, they clung to their equity and bootstrapped their little business.

Instead of ordering servers from Dell, Hauser found a local computer company and sold it on his vision for the future. Hauser asked the owner to make a server for him below cost, arguing that if Grasshopper achieved its vision, Hauser would soon buy many more. When Howard Stern moved his show to satellite radio, Grasshopper offered to support Stern’s new medium in return for significant concessions on the price of a commercial.

Grasshopper also offered discounts if customers paid for a year’s worth of service up front, effectively turning its customers into financiers of the business. Despite its growth from start-up to $30 million in revenue in just 12 years, Hauser was able to retain the majority of the equity in his business, which he sold to Citrix in 2015 for $165 million in cash and $8.6 million in Citrix stock.

You can hear the full story in his interview from John Warrillow’s Built to Sell Radio,  a regular podcast revealing the stories and advice of business owners who have sold their businesses. To hear the full interview, click here.

So, are you building value in your business?

Now you have had time to think about the stories above, are you building value in your business or giving it away by sharing equity? If you want to be a Value Builder avoid chasing low-margin revenue that will suck up your cash and force you to sell shares. Instead, focus on your product or service with the highest margin and best cash flow characteristics because those offerings allow you to grow without diluting your equity.

You can also take the value builder assessment to see where you are in your business now and identify where you need to make improvements.

In the meantime, please get your free copy of the eBook, Famous Or Rich: 9 Ways Value Builders Prioritise Wealth Over Recognition.

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