Money or power: Tough decisions facing entrepreneurs

 

In 2008, Noam Wasserman published an article in theHarvard Business Reviewdiscussing the results of a recent study he had conducted on entrepreneurship. Wasserman’s research revealed a remarkable fact about the nature of company founders and the choices they make on the road to growing their companies.

In a survey of 212 technology-oriented entrepreneurs, Wasserman explored the factors that led company founders to either stay the course or step aside and let a professional CEO take over.

Though most entrepreneurs don’t realize they are doing it, almost all make this critical decision relatively early in their company’s development. They choose between maximizing their personal wealth or retaining control of their companies, and, according to Wasserman, the two are almost always mutually exclusive.

Wasserman found that overall, company founders who elect to raise equity financing from external sources (angels, VCs and others) tend to do better for themselves financially. At the same time, these founders wind up ceding control of their companies by giving up large chunks of equity in exchange for cash and other resources from their investors.

Company founders who reject opportunities to raise external financing are those who prefer to remain in control of their companies. By eschewing the capital, resources and expertise that come with raising venture financing, these entrepreneurs forego a chance to maximize their earnings from the venture. To these entrepreneurs, money is simply less important than power.

While it is possible for a founder to remain at the head of his or her company from its earliest days to IPO and beyond, this is a rare exception to a well-established rule. Entrepreneurs with the knowledge and expertise to be effective leaders of small companies and who also have the skills to scale into very large organizations without needing external financing (or very little) are uncommon indeed.

Notable entrepreneurs who have remained in control of their companies from start-up to blue chip include Bill Gates, Steve Jobs, Vinod Khosla and Michael Dell.

Read Noam Wasserman’s excellent article, entitled“ The Founder’s Dilemma,” for a deeper look into the critical choice that every entrepreneur consciously or unconsciously makes.

References

Wasserman, N. (2008, February). The Founder’s Dilemma.Harvard Business Review. Retrieved May 26, 2010, from http://hbr.org/2008/02/the-founders-dilemma/ar/1.

Tags: management