“Finance is the art of passing money from hand to hand until it finally disappears.” – Robert W. Sarnoff
If you can sell stock in your company to finance your growth, some financial advisors would urge you do so. If you are creditworthy, bankers will tell you to borrow what you need. Using other people’s money (OPM) — whether it comes from financial institutions or investors — is a great way to pay for growth, because what you give up for the money is usually modest in comparison to what you get.
That’s the conventional wisdom — and for some of the businesspeople I know, debt- and/or equity-based growth has been a godsend. One of my main competitors took his direct-marketing company from nothing to $300 million that way. Another friend of mine developed the most successful investment newsletter in history using that method.
But for everyone I know who has used OPM to finance growth, I know two or three who have done so and regretted it.
The most obvious reason: If your great idea bombs (yes, it might), you are now the same-sized company as you were before — but with a load of debt or a gang of angry investors you didn’t have before.
But that’s not the real problem with OPM. There is a hidden weakness to it that can break up the whole business.
OPM feels less real than your own. When you are planning a project with OPM, you allocate money to this and that, spending what you think is “reasonable,” while knowing in your heart of hearts that you wouldn’t ever spend that kind of money on that kind of thing if the money were your own.
OPM is like play money. You get it, you allocate it, and you see what happens. If it works, great. If it doesn’t … well, it’s OPM.
I’m not saying this exactly right. I don’t mean to imply, for example, that everyone who uses OPM doesn’t care about the investor or doesn’t work very hard to make the project work.
What I’m saying is that there is something in the process of using OPM — the initial budgeting, decision-making process — that makes a difference in how you spend the money. It makes you a bit too optimistic, a shard less scared, a tad too visionary. It allows you to spend money on things like focus groups, marketing studies, and consultants that you’d never bother with if the dollars were coming from your own back pocket.
One of my best friends has been in business with me four times in the past 20 years. He has been wildly successful three of those four times. The one time he failed was the one time he had none of his own money in it. One day — years after we had closed that business — he told me he thought that although he had worked hard on it, he never worked “as hard” as he had on the other three.
“Next time we do something together,” he advised me, “make sure I have my money in it.”
According to what I’ve read, Hewlett-Packard has had a long-standing policy of rejecting debt to maximize value. Instead, the company implemented a “pay-as-you-go” policy for growth. Their people were told that any new projects and developments (even acquisitions) had to be paid for with available cash.
Instead of limiting options, the policy was supposedly the lynchpin of their growth. Lean and efficient was everyone’s style. Innovation came from bootstrapping. Rather than being limited by money, ideas were enhanced and strengthened by the lack of it.