How to fund growth without losing control

1 The bottom line

Fund growth from your own cash flow first, borrow second, and sell equity last, and only on terms that leave you the board. Whoever supplies your capital gets a say, so choose the supplier before you need the money.

2 Key takeaways

• Let each profitable step pay for the next. Cash flow brings no lender or shareholder with a say.
  • Ingvar Kamprad, IKEA15:55 took one small bank loan at age 12 and then reinvested cash from each product line. IKEA grew to a $50B revenue business with no equity or debt investment, per the hosts.
  • Rockefeller, Standard Oil52:44 and a few friends could pay for a refinery themselves and have it earning in months.
• Borrow in small, short pieces, and keep shopping for lenders. One bank's refusal tells you about that bank, not about your business.
  • Rockefeller, Standard Oil10:50 went to another bank each time one turned him down, until he got what he wanted.
  • David Packard, Hewlett-Packard25:00 was turned down by Bank of America, then got a signed note from the small Palo Alto National Bank.
• Make customers, suppliers and partners carry part of the capital. Their money costs you no shares.
  • Nike1:40:07 made retailers pay six months ahead for a 7% discount.
  • Coca-Cola50:20 kept the syrup and left the factories, trucks and bottles to franchised bottlers.
• Sell equity only when it buys more than money, and keep the board. Investors who bring skill or credibility are worth a share. Investors who bring only cash rarely are.
  • Bill Gates, Microsoft49:20 sold 5% for $1 million to hire expertise, not because he needed the cash.
  • Accel, Facebook1:33:37 invested $12.7 million for under 20% and left Zuckerberg in board control.
• Never sell control in a hurry or without knowing the buyer's motive. The buyer's real aim shows only after the deal is signed.
  • Saul Price, Costco40:46 sold a majority of FedMart to Hugo Mann without asking why Mann wanted it. Mann wanted the real estate and fired Price at the first board meeting.

I have to have control

Henry Ford, Ford Motor Company

2.1 Make your own cash flow the first source

Profit that you reinvest is the only capital that comes with no strings.

• Roll every profit into the next unit of growth. Sam Walton, Walmart17:30
  • Walton and his brother put everything into the stores and never kept or paid out the money. Each profitable store funded the next.
  • The strain taught them lessons about volume and efficiency that they later used for Walmart.
  • Walton ran his first five and a half years from one store, then compounded through a chain Walmart17:30.
  • He said that if Walmart had been well funded, it might never have tried the small towns that held far more business than anyone expected Walton, Walmart1:32:40.
• Pick a way of growing that earns before it spends. Carnegie and Rockefeller52:44
  • Rockefeller's growth was financed internally, and his bank loans were mostly short cash flow loans, quickly repaid.
  • Carnegie sold bonds to Junius Morgan for some plants but otherwise kept away from investment bankers and securities markets.
  • Railroads had to spend millions on track and rolling stock before earning a nickel, so they depended on public markets Carnegie, Rockefeller, Gould52:44.
• Write down your own rules and accept a slower pace for safety. Ingvar Kamprad, IKEA11:26
  • Kamprad's iron laws required a good cash reserve, owning all property and self-financing all expansion.
  • No landlord or lender could squeeze the company, and he said "Profit gives us resources."
  • Having no shareholder or lender let him pick long-term decisions over short-term ones Kamprad, IKEA15:55.
• Pay the bills with side income while the main bet waits. Phil Knight, Nike36:14
  • Knight kept working as an accountant, then took a lighter teaching job. He first drew a salary of $18,000 in 1969, about seven years after starting Blue Ribbon.
  • Qualcomm47:10 paid its bills with consulting while it waited for CDMA, and a Hughes satellite proposal is where CDMA came from.
  • Disney3:35:55 waited until Disneyland, television and merchandise gave it a stable base before starting Buena Vista in 1953. It had been paying outside distributors about a third of total rentals.

2.2 Let others float the growth

Customers, suppliers and partners can fund your growth without taking a share of the company.

• Get paid before you pay. Jeff Bezos, Amazon3:40:41
  • Customers pay immediately and suppliers are paid months later, so the business funds its own growth at a negative cost of capital.
  • Prime pushes this further by collecting a fee upfront.
  • Amazon raised only about $10 million in venture money and $55 million at IPO, plus roughly $2 billion of convertible debt Amazon3:40:41.
• Ask your customers to prepay when demand is high. Phil Knight, Nike1:40:07
  • The Futures program had retailers commit and pay six months ahead for a 7% discount.
  • Retailers refused at first, but waffle trainer demand was so high that prepaying was the only way to get stock.
  • The program later softened Nike's revenue dip in the early 1980s Nike1:40:07.
• Keep the high-margin part and push the capital-heavy part to partners. Coca-Cola50:20
  • Coke makes syrup and markets the brand. Franchised bottlers carry the factories, trucks and bottles.
  • It still dictates standards such as truck color and bottle shape, so it gets control without the capital.
  • Coke has higher gross margins and returns on invested capital than its bottlers, and 200 bottling partners run 950 facilities Coca-Cola50:20.
• Find the asset that opens a bigger pool of capital. Ray Kroc, McDonald's30:11
  • Harry Sonneborn proposed buying land and leasing it to franchisees, which created a steady upfront revenue stream.
  • Banks would not lend against a contract worth 1.4%, but real estate opened mortgages and then life insurance companies.
• Sign a deal that pays you through the lean years. Google1:39:43
  • After venture money dried up in 2000, Google back-filled Yahoo's organic search results under the powered by Google label. Yahoo also invested $10 million.
  • Yahoo paid $7.2 million in 2001, and the revenue carried Google until AdWords took over Google1:39:43.
  • After Zuckerberg turned down Yahoo, a Microsoft ad deal lifted Facebook revenue from $9 million in 2005 to $48 million in 2006 and $153 million in 2007 Zuckerberg, Meta1:55:17.

2.3 Borrow, but on your terms

Debt keeps your ownership, so learn to get it, and shape it so the lender cannot reach your core.

• Treat borrowing as a skill and keep shopping for lenders. Rockefeller, Standard Oil10:50
  • He had to borrow to front money to produce shippers, so he learned how. When a bank turned him down or lectured him, he went to another.
  • He told his partner they should borrow whenever they could safely.
  • Packard went from Bank of America to a small local bank whose president listened and wrote a note. When HP outgrew its lending limit, it moved up to Wells Fargo Packard, HP25:00.
• Look for lenders who back the founder, not only the collateral. Phil Knight, Nike52:57
  • After a bank threw him out, Nissho's people spent days going through every book in the Nike office. They agreed to extend credit because they were more entrepreneurs than bankers.
  • Nisho Iwai took market interest plus a 4% royalty on every shoe sold and introduced Knight to Japanese factories Nike1:04:30.
  • Nike's 1972 revenue of $3.2 million was fully financed by Nisho. Knight knew such firms could take over companies, so he had to protect his control Nike1:04:30.
• Pitch lenders with a forecast you can hit. Sam Walton, Walmart35:45
  • In 1969, with $21 million in sales, Walton told skeptical life insurance lenders that sales would reach $230 million in 1975. He had a working system behind the number.
  • 1975 sales came to $236 million Walmart35:45.
• Put the lender's reward on a piece of the business, not the whole. Larry Ellison, Oracle36:01
  • In a 1991 cash crunch, Ellison told an employee to raise around $200 million while giving up as little equity as possible.
  • He got an $80 million loan from Nippon Steel, which received warrants on 25% of Oracle Japan, not on Oracle itself Oracle36:01.
• Choose debt over the options that hurt your owners, and build the banker relationship early. Morris Chang, TSMC1:24:50
  • With Goldman's advice, Chang rejected cutting the dividend or selling new stock, since about a third of investors cared deeply about dividends. He chose to borrow.
  • He had joined Goldman's board and done the 1990s ADR listing with them years before TSMC1:21:12.
  • He took only half of what Apple asked for, and TSMC still had to borrow billions of dollars TSMC1:24:50.
• Grow only as fast as you can digest. David Packard, Hewlett-Packard26:15
  • A retired engineer sent by Wells Fargo told him that more businesses die from indigestion than starvation.
  • It backed HP's habit of growing only as fast as profits allowed, and Packard said he saw the truth of it many times HP26:15.

2.4 When you sell equity, buy more than cash

Outside equity is worth it when the investor brings skill or credibility, and the terms leave the founder in charge.

• Take investors who bring something money cannot buy. Bill Gates, Microsoft49:20
  • Microsoft did not need the capital. Gates was essentially hiring the expertise of Technology Venture Investors.
  • Noyce and Moore put up $250,000 each alongside Arthur Rock, who added $2.51 million Intel35:30.
  • Peter Thiel's fund put $20 million into SpaceX in 2008, and Musk says staying friendly after PayPal made that possible Elon Musk, SpaceX37:27.
  • Daimler took a $50 million stake in Tesla after executives drove a working prototype that hit 60 mph in 4 seconds Musk, Tesla38:05.
• Negotiate board control into the round. Mark Zuckerberg, Facebook1:33:37
  • Accel's Series A was $12.7 million at a $98 million post-money valuation, and it left Zuckerberg with board control. Facebook had the leverage to demand this.
  • Sean Parker warned that VCs would take the board, bring in professional management and fire him. He steered the first round to angels and Thiel's Founders Fund Meta1:18:36.
  • That control later let Facebook ride out a 50% post-IPO drop and the mobile pivot without being forced to sell or change course Meta1:18:36.
• Spread the cap table so no one investor holds leverage. Ken Langone, Home Depot46:40
  • Perot offered $2 million for 70%. Langone instead found about 40 investors at $50,000 each, who got 50%.
  • He accepted a lower valuation to get that result.
• Use structure to raise money without handing over control. Bernard Arnault, LVMH37:02
  • Holding 51% of a financial company that holds 51% of the operating company gives control while dividing the capital outlay.
  • When he needed cash, he floated a subsidiary on the stock market, so small shareholders replaced the bankers.
  • Offering Dior Couture's capital to private investors raised 3.3 billion francs to buy more LVMH shares LVMH37:02.
  • Visa2:27:10 put the antitrust liability in B shares held by the banks, so new A shareholders were protected. The 2008 IPO raised about $18 billion, nearly all of it secondary sales, because Visa did not need capital.
• Go public when the books demand it, and keep a large stake. Phil Knight, Nike54:08
  • Knight feared going public meant losing control. His mentor Chuck reviewed the books, found only debt and no cash, and said it was mandatory.
  • Because he had used loans, trading company financing and convertible notes, he still owned 46% at the December 1980 IPO Nike3:35:44.
  • Home Depot's 1981 IPO ended up raising about $4 million at a $32 million market cap after Bear Stearns cut the raise from $6 million. Early investors skipped cashing out at nearly 2x Home Depot1:15:50.

2.5 Guard against the deals that cost you the company

Most control is lost in one rushed deal, or by taking more money than the business needs.

• Ask why the investor wants the deal before you sign. Saul Price, FedMart40:46
  • Price needed growth capital to compete with Walmart and Kmart and sold a majority to Hugo Mann without asking his motive.
  • Mann wanted the real estate, not hypermarkets. He fired Price and his son at the first board meeting and changed their office locks.
  • The Prices later said the warning signs were obvious but they were caught up in the euphoria of a big deal. Mann took 64% Sol Price, Price Club42:42.
  • FedMart was dead within five years Costco40:46.
• Turn down cash that trades away control, even when you are short. Walt Disney43:15
  • After Steamboat Willie, every distributor wanted to buy the studio. Walt refused to surrender control no matter how badly he needed revenue.
  • Henry Ford ran up his stake to 51% in 1906 because he needed control to keep one idea. By 1919 he owned 100% Henry Ford43:20.
  • Zuckerberg shook on Yahoo's $1 billion offer, then walked when Yahoo's stock fell 20% and the offer became worth $800 million Meta1:55:17.
• Do not take more money than the business can use well. Ross Perot, NeXT35:26
  • Perot put $20 million into NeXT for 16%, and Jobs also raised $100 million from Canon and $60 million from IBM. Flush with cash, NeXT bought floating staircases and $10,000 chairs before shipping a product.
  • Perot's conclusion was "I gave Steve too much dang money."
  • NeXT burned $39 million in a year when it planned to lose $3 million NeXT35:26.
  • Microsoft diluted only for Ballmer's equity and an option pool. Gates still held 49% at the 1986 IPO Microsoft3:22:30.
• Buy out partners who cap your ambition or share your future. John D. Rockefeller14:15
  • His first partners disliked his heavy borrowing. He secretly lined up a backer, called their bluff on dissolving, and outbid them at auction.
  • Kroc paid the McDonald brothers $2.7 million with money from 12 lenders, who took the half percent of sales the brothers had been receiving McDonald's40:23.
  • The lenders made $12 million. Kroc says the half percent would be $15 million a year on 1977 sales of over $3 billion Kroc, McDonald's40:23.
• Remember that backers can take your name and your company. Thomas Edison55:00
  • Edison raised money from the Vanderbilts and JP Morgan, who made the company bank with his firm.
  • Morgan later erased Edison's name from the corporate entity without telling him. The merger became General Electric, and Edison sold his stock and left Edison55:00.

2.6 Where they differ

Zero outside capital works for some businesses, but others need outside money, and selling equity can still pay off.

• Pure cash flow versus disciplined debt.
  • Kamprad15:55 took no equity or debt investment at all. Knight3:35:44 used bank loans, trading company financing and convertible notes, and put up his house for a loan.
  • Knight said he had no slack, so debt kept his ownership but raised his risk Nike3:35:44.
• Capital-heavy businesses cannot self-fund.
  • Sam Altman, OpenAI45:25 announced a capped-profit entity in 2019 to pay for compute, and took $1 billion from Microsoft that year.
  • Taiwan's government put up 50% of TSMC and Philips 28%, and Chang received no equity at founding Morris Chang, TSMC1:02:13.
  • Qualcomm gave up half its equity in the 1988 Omnet merger to fund Omnitracs. Some were bitter, but Omnitracs did $32 million in its first year and financed the CDMA bet Qualcomm1:02:00.
• Selling a stake can be right even if you resist it.
  • Kroc resisted selling stock but found $1.5 million for 22% irresistible in 1959. The insurers sold within a few years for $7 to $10 million, though the stake would have been worth over $500 million in 1973 McDonald's37:00.
  • Walt Disney wondered, after selling shares to outsiders, whether he had crossed a bridge he could not go back from, and said "You never win with the bankers" Disney1:18:40.
• Going public solves problems and creates new ones.
  • Marchionne2:25:00 floated 10% of Ferrari at a $9.8 billion market cap and raised just under $1 billion to repair Fiat Chrysler. The public company clashed with Luca di Montezemolo's way of running Ferrari, and it cost him his job as chairman in 2014.
  • Google's3:09:00 Dutch auction cleared at $85 against an expected $108 to $135, and the stock jumped about 18% on day one. Nobody has repeated it.