Why these Small Businesses are Turning Down Big Money

Small Business, Big Lessons is a podcast from Buffer that goes behind the scenes with inspirational small businesses to explore how they are questioning the best ways to build a business and uncover the big lessons we can learn from their journeys (so far). Check out the second episode here.

In 2014, Buffer was offered a nine-figure deal from a giant tech company but our founder Joel Gascoigne turned it down. He’s not alone. While it may seem counterintuitive at first, sometimes saying no to big money can be the best move you can make for your small business. Oftentimes, if accepted, this money comes with strings attached that can alter your vision for your company. Choosing to do things on your own terms instead – but on a tighter budget –  can lead to a more sustainable business that allows you to make a greater impact as well.

In season two, episode two of our podcast, Small Business, Big Lessons, we spoke to entrepreneurs who chose to walk away from the traditional venture capital (VC) funding path without any regrets. In this companion blog post, we'll share their stories and why pursuing alternative models of funding was the right option for them.

What’s been the status quo for funding

Starting a business from the ground up is no easy task and usually requires at least some amount of money upfront. Traditionally, startups and small business owners might consider VC funding as a way to gather large investments. VCs will typically come in during the early stage and will inject a lump sum of money into the business to help get the ball rolling.

But just because an investor agrees to fund your business doesn’t mean they believe in your brand’s mission wholeheartedly. The traditional VC model operates by spreading a large amount of money across a range of companies, expecting at least some of them to fail. They earn back their investments by relying on the few startups and businesses that do succeed.

Once an investor comes on board, they usually will retain quite a bit of control over the business as well, impacting a company’s culture and operations. Unfortunately, the VC funding model is conducive to fast pace growth – which isn’t always the healthiest environment for these businesses.

You may already be seeing some of the downsides to traditional VC funding. So does Rand Fishkin, co-founder of Sparktoro, a small business revolutionizing audience research. Rand has a ton of experience in small business growth – he previously co-founded Moz, a SEO tool and software. He believes that this business model can actually hurt brands.

“What I believe is that if you don't force companies to pursue hyper growth, they are more likely to survive long term, and survival long term gives options for being profitable and giving off dividends to investors,” Rand said.

The other drawback here is that when entrepreneurs are approached by VC firms or angel investors –  individuals who use their own capital when investing – they can feel a ton of pressure to accept the deal, even if their vision doesn’t completely align with the investor’s goals.

Holly Howard, a business coach who consults entrepreneurs on the best strategies to pursue for their brands, also believes individuals should be more cautious when fundraising for their small business. Holly understands that entrepreneurs feel pressured to accept deals that seem promising on the surface. But she recommends individuals take a step back and really reflect on the deal.

“When we're in a stressful situation, we sometimes undermine our own values, because we feel like we need that money, or we're not sure if any other money is going to come through,” Holly said.

If you don’t accept these huge injections of cash, you may be wondering how else can a business get off the ground? Well, here are three other small businesses that managed to succeed without VC funds.

How these businesses gained more by pursuing alternative funding routes

While VC funding can garner tons of press and media attention, it is by no means the only option for growing a business. When working with clients, Holly reminds them that there are alternative routes that can be better suited for their companies.

“Fundraising is such a broad question,” she said. “And oftentimes, when people come, they think it's a very narrow question, you know, their concern is just raising money, and they don't realize the broad spectrum of possibilities.”

At Buffer, we’ve followed a somewhat non-traditional approach when it comes to growing as a startup. In 2018, we bought out our main venture capital investors. Even before then, back in 2014, Joel defied expectations when walking away from Buffer’s largest acquisition offer to date. But the decision didn’t come easily. It was only after many thoughtful conversations with the executive team that the answer became clear. In these meetings, Joel really reflected on Buffer’s mission and one specific question he asked himself was, “Are we done yet?”

“It was great because it led to really thinking deeply about, ‘why are we doing this?’ ‘What more can we do here?’ What do we gain if we take [the deal] and what do we lose?’” Joel said.

Ultimately, Joel realized there was still so much more he wanted to pursue with Buffer, and he knew the journey wasn't over yet. Another reason he declined the large offer from the tech company had to do with their plans for the future of Buffer. Had that company taken over, the reality was Buffer would no longer be a remote and transparent company.

“Where I really gained clarity was more in the cultural choices we made, especially the movements we ended up being a really big part of at the time, that was remote work … and then the other one was transparency,” Joel said. “Which to this day, we're probably still one of the most transparent companies in the world.”

By turning down this offer, Joel was able to keep Buffer’s core values intact.

A friends and family round has given Harlow more flexibility with their business

Harlow, a small business that helps freelancers organize their work, was founded in 2021 by Samantha Anderl and Andrea Wildy. The duo knew they didn’t want to build a company that only valued growth, which is why they decided from an early stage that VC money wasn’t for them.

Instead, they opted to do a family and friends round, which is a type of crowdfunding where many individuals – whether they be relatives or friends – can invest in your business. This kind of funding typically comes with fewer restrictions. A huge benefit of this is its led Harlow to have a variety of great investors who truly care about their business.

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“We lean on our investors all the time. If we're struggling with any aspect of the business, there's somebody on the cap table that can help us out,” Andrea said.  “And we were also able to be picky about the types of people that invested in the business and we're really proud of the fact that over 50% of our investors are female.”

This model of funding has also forced them to be very deliberate with their financial decisions. But Samantha believes this ultimately allows them to run the business in a more sustainable way as it forces them to deepen their existing connections.

“We can't just come out of the gates and spend, you know, $50,000 a month on paid advertising to grow and get the word out there. Again, that kind of comes back to the benefit of community and building your audience in a sustainable and lean way,” Samantha said.

Both Andrea and Samantha are happy with their decision to crowdfund, as they know this has allowed them to run the Harlow the way they originally envisioned.

Personally investing allowed Paynter Jacket to be more creative and intentional in their approach

Becky and Huw co-found Paynter Jacket, a clothing company that releases four limited edition jackets each year, with 100 percent of their own personal savings. The co-founders were still early on in their careers, so the savings didn’t amount to much at the time. Still, they were able to stretch the money to cover all of their main costs: web designs, fonts, fabrics, and their manufacturing process.

Becky believes the fact that they had a limited budget which consisted entirely of their own money played a huge role in their eventual success.

“We had to make decisions that we felt were the right ones. We had to really consider those. I think also having a constraint definitely makes you more creative with your outcome … and it’s continued the way that we work today,” Becky said.

Their personal savings weren’t enough to cover the manufacturing costs initially, which is why they decided to use the ‘make to order’ model, which has now become an integral component of their business.

Paynter Jacket's latest release: The Italian Denim Carpenter Jacket (Courtesy of Paynter Jacket)

Today, Paynter Jacket drops sell out within minutes. This success has grabbed attention from multiple investors, but Becky and Huw aren’t interested as they don’t want to lose control over their vision for the brand. They’re very intent on being a different kind of clothing company, one that’s moving away from the fast fashion approach. For Huw, investing their personal money has made him even more connected to the business – and he and Becky don't plan on stopping anytime soon.

“We’re building real businesses, not businesses that we hope that one day we're going to flip or sell…,” Huw said. “We love what we do. We want to be doing this for as long as we can. As long as we can keep getting away with it.”

By foregoing the VC approach, you can provide more stability for your employees

What makes up a small business are the employees and team members who embrace the mission, put in the work, and create a unique culture. But more often than not, these very individuals become collateral damage – a consequence of following a traditional VC funding route. This is because VC funding leads to a high risk approach where people are seen as cogs in the machine.

“I don't understand how these high growth, high risk companies can attract people to them,” Rand said. “Who wants to work in an environment where it's like, okay, ‘now probably next year, we'll be out of business and have no jobs.’ What a pitch as an employee!”

Fortunately, other investment models can put your employees first – not your business growth. When you create a beneficial atmosphere for your workers, you’ll often see your team members’ output and happiness will increase. That’s what we found at Buffer when we transitioned to a four-day work week in 2020.

Your employees’ well being should be a huge factor in how you approach your business growth as they’re essentially the heart of your company.

Staying true to your vision and higher purpose

Ari Weinzweig of Zingerman’s community of businesses turned down what many would consider an offer of a lifetime – opening up a store in Disney World. If he had pursued the offer, it’s safe to assume this would create a world of opportunities for Zingerman’s. Yet, for Ari and his business partner Paul Saginaw, the decision to pass on one of the biggest companies in the world wasn’t difficult at all.

“The longest part of the conversation was how the [Disney team] wanted to explain to me why I wasn't understanding how great of an opportunity it was,” Ari said. “And I tried to say, ‘I’m honored that you're asking – it's a really great compliment. But it doesn't fit our vision.’ And finally, at the end, I just said, ‘if you want to open a Disney in Ann Arbor then we could talk.’”

You may be a bit confused as to why exactly Ari chose not to partner with Disney. The entrepreneur practices visioning, that is, laying out clear goals of what success looks like for Zingermans, and he sticks to those goals when considering all business opportunities.

Ari always knew he wanted to open up a community of businesses in Ann Arbor, Michigan specifically. Opening up a store in Disney World and venturing out of Michigan would mean straying from his initial vision, which is why it was so easy for him to say no to the offer.

By sticking to these values, Ari has learned not to be reactive when making decisions, but intentional instead. He believes this has allowed him to keep his community at the forefront. While he does acknowledge this approach can lead to limitations, he believes these are good limitations to have.

“And theres problems that go with [turning down big money] — you're constrained. But it's the constraints of your choosing, and you're choosing to make your art in a way you feel really good about,” Ari said.

Understanding your business’s higher purpose is essential when considering accepting money from investors. Holly believes that all entrepreneurs need to thoroughly assess who they talk money from, especially because this decision could mean releasing control over their vision.

“What people tend to overlook when they are in the fundraising process is that they should be vetting the investors themselves,” Holly said. “You still want to understand if there's mutual respect for values, and especially if there's mutual respect for your vision of where the company is going.”

All of these companies – Buffer, Harlow, Zingerman’s, and Paynter Jacket – turned down big money offers and are thriving to this day, proving that money isn’t always the answer when growing your business.

Want more on turning down big money? Check out the full episode.

The businesses we interviewed in this episode have further insights to share about turning down big money and its value for brands. Check out the full episode here.

By: Umber Bhatti
Title: Why these Small Businesses are Turning Down Big Money
Sourced From: buffer.com/resources/turning-down-money-business/
Published Date: Wed, 12 Oct 2022 11:00:40 GMT

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  • Walter Acosta

    Walter Acosta is a blogger. His primary interests are in digital marketing and content creation and curation.

    walter.acosta@yourwebenterprise.com Acosta Walter

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About the Author: Walter Acosta

Walter Acosta is a blogger. His primary interests are in digital marketing and content creation and curation.