It has become received wisdom in recent years that any new business needs significant investment to get off the ground. Growth needs to be fast, preferably international, and organisations need to scale up quickly to maximise what is a perceived to be a small window of opportunity. But is this really the case? Opting for steady, self-funded growth has a number of benefits – not least in ensuring the business owner remains in control.

Lost focus

The external funding rollercoaster demands management time, attention and resources from day one. It will typically take a CEO or business owner upwards of six months’ dedicated activity to raise external funding - time which should be focused on core business operations. Securing those external investors prompts a whole new set of management overheads, from board meetings and board packs to higher levels of governance, often requiring the investment in a Financial Director rather than book keeper. The upward cycle of expenditure kicks in immediately.

Indeed, the rate at which expenditure rises post funding injection is often extraordinary. While business owners are understandably prudent with their own money, third party funds are quickly spent on scaling up employees, moving to bigger premises and exciting marketing campaigns – there is typically far less rigour applied to expenditure decisions.

The problem is that in almost every single case, the predicted revenue does not come in as quickly as hoped. So the business has scaled up – new people, new offices, new commitments – and there is no way to manage these fixed costs without another finance injection. At which point, of course, the business is not looking quite such an attractive option to investors. Funding – if attainable – is more expensive and business owners will see their ownership diluted quickly. Within months a solid business start-up, 100% internally owned, has become an unmanageable and unprofitable set of overheads owned by third party investors. Time to walk away?

Retaining control and profit

It doesn’t have to be this way. While the window of opportunity argument can appear to be compelling, even in the fast paced tech industry it is not a given. Exceptions such as Uber occur, of course, but most well run, focused companies can grow steadily without missing the boat. Indeed for UK companies the market opportunity is simply not big enough to deliver that tenfold growth that can be achieved in larger markets such as the US. Growth in the UK is by default more measured and should, therefore, be possible without handing over control to third party investors.

By opting to self-fund, a business owner can remain 100% focused on the company – there is no need to woo investors or spend time justifying decisions. Yes there is less money to spend but that also means those investment decisions will be rigorously considered: marketing will be totally targeted; new staff will be hired to meet specific needs, not just to boost the headcount. Plus the founders retain total ownership and access to the profits as and when they arise.

Investors also demand an exit, so from the moment they invest the clock is ticking for either an IPO or more likely a trade sale in five years' time, whether the founders want to or not.

There's a subtle difference between what is good for the business – fast growth, external investors, more governance – and what is the cost for the business owner – loss of control, less financial gain, forced exit. The logic often advanced by potential investors is that the founders will be better off financially with a smaller piece of what will then be a much larger pie. However, unless your business is certain to double in value every year then I'd argue that the founders will often be better off both financially and emotionally by growing the business less quickly, but more controllably and with less dilution.

By John Paterson, CEO and Founder, Really Simple Systems