Wednesday, December 7, 2016

Founders Have to Choose Between Growth and Keeping Control

Maria Jose Sorto
Founders Have to Choose Between Growth and Keeping Control
Updated Nov. 21, 2016 8:07 a.m. ET

To founders of startups they see their company as their baby, so taking care of it and having control is very important. However, this might be a problem because it usually results in lower valuation of the company. In a study done by Noam Wasserman, a former Harvard Business School professor, he demonstrated how a startup’s valuation can be greatly affected by how much control the founder has. Valuation of a start up after first two years falls by an average of 17.1% to 22% if the founder stays as chairman or chief executive. The study also showed that the longer the founder stayed in one of these positions, the more the valuation continued to fall. What happens is that after a startup has passed the beginning stage and it becomes a more complex company, founders need the help of outside investors and managers that can assist both financially and with skills the founder lacks.  However, having managers and investors involved means that the founder has to let go of some power and control. Investors, especially venture capitalists, want to have a voice and power in a company where they are investing their money and time. However, the founder is usually unwilling to give up this power and don’t focus on growth and financial success that investors concentrate on. It is a tough situation and decision for founders to make but they have to decide if they are willin to sacrifice some power in order to guarantee financial success.

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