Growing the Pie

photo_money_pie.jpgLittle Jack Horner, sat in his corner, eating a Christmas pie. He stuck in his thumb, and pulled out a plum, and said “how big is my slice, again?” Why is it that people always seem to worry about the size of their own personal slice of the proverbial “pie?”

Its true. You see it in startups, mergers, acquisitions, takeovers, and divorces. Hell, you even see it in marriages nowadays. You see it in departmental squabbles, territorial conflicts, and other such places. Nasty stuff.

Instead, they should be focusing on growing the size of the whole pie. In doing so, everyone’s slice gets bigger. Everyone benefits.

You see this quite a bit with entrepreneurs in their dealings with venture capitalists. The entrepreneur doesn’t want to give up too much equity to the VC, and the VC wants a lot more for his money than the entrepreneur is willing to hand over. This conflict invariably spills over into the valuation as well, with the entrepreneur fighting for the highest pre-money valuation possible, and the VC clawing in the other direction.

Instead, many of these entrepreneurs should take a different approach. They should do their best to convince the money guys that they are passionate about their business, and that they are committed to growing the business to unparalelled heights. Convince them that you are dedicated to creating as big a pie as possible.

I’d rather have 10% of a $10M company than 50% of a $1M company. I’ll bet you would agree.

As long as you are dealing with “smart money”, this is a win-win. If the VC can bring relationships and other human capital to the deal, then the sizes of the pie slices don’t mean as much, as your chances for success go up exponentially. This is the smart money factor at work. No guarantees, mind you, but the odds are in your favor.

On the other hand, if you are dealing with “dumb money”, then I would recommend fighting a little harder. Save as much equity as possible for those folks that can really accelerate your venture.

The bottom line is this: If the entrepreneur grows the size of the larger pie for everyone, then the next time around, they will have a lot more leverage when it comes to the sizes of the slices being handed out. Focus first on building a great company, and go from there.

Cheers.

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