9 Great Ways To Build Wealth As A Business Owner – Series (4 of 9)
This series of articles follows on from an article we published recently, titled “9 Great Ways To Build Wealth As A Business Owner”, where we mentioned that business owners who focus on building company value over company size, generally get to sell their businesses for a premium when the time comes to exit, allowing them to cash out the maximum with no regrets.
This article looks at David Hauser’s story about Grasshopper and covers the 4th way – Protect your equity.
David Hauser has been an entrepreneur for most of his life. He had several small money-making ventures in high school and studied entrepreneurship at Babson College. He started a web design business after graduation, followed by an internet advertising company.
Through his early experiences in entrepreneurship, Hauser discovered that one of the most frustrating parts of starting and growing a small business was acquiring a phone system. Back in the late 1990s, big companies used a PBX system to route calls throughout a switchboard, but a PBX system was prohibitively expensive for most small companies to acquire and maintain.
Hauser and his friend Siamak Taghaddos imagined a “virtual PBX” that allowed small business owners to leverage the internet to create a phone system without having to buy any of the hardware. They built a crude version of the technology, named their new company GotVMail (later rebranded as Grasshopper), and launched in 2003.
By 2004 they had acquired their first few customers and could see that to grow, they would need to buy servers and a lot of advertising to drive demand. The venture capital markets were starting to thaw after the dot com bust of 2001, but Hauser chose not to raise venture capital even though an injection of outside money would have put Hauser and Taghaddos on the map and given them the capital they needed to become industry leaders overnight. Instead, they clung to their equity and bootstrapped their little business.
Instead of ordering servers from Dell, Hauser found a local computer company and sold it on his vision for the future. Hauser asked the owner to make a server for him below cost, arguing that if Grasshopper achieved its vision, Hauser would soon buy many more. When Howard Stern moved his show to satellite radio, Grasshopper offered to support Stern’s new medium in return for significant concessions on the price of a commercial.
Grasshopper also offered discounts if customers paid for a year’s worth of service up front, effectively turning its customers into financiers of the business. Despite its growth from start-up to $30 million in revenue in just 12 years, Hauser was able to retain the majority of the equity in his business, which he sold to Citrix in 2015 for $165 million in cash and $8.6 million in Citrix stock.
Protect your equity
As the story of David Hauser illustrates, Value Builders guard their equity like a greedy child hoarding a bag of Halloween candy. Rather than selling their friends and family cheap shares or chasing a venture capital investment, Value Builders use other forms of financing to start and grow their business, often only offering equity as a last resort.
Rather than thinking of your shares as currency to help you grow or make employees feel like owners, consider your stock as the essential ingredient to building value.
Rather than pursuing institutional investors, Value Builders often bootstrap their business and frequently use their customers to fund their growth. If they do seek outside funding, it is more likely that they are being courted by investors and can therefore set their terms rather than the other way around.
You don’t have to seek out external funding to be successful. The owner who solicits consecutive rounds of outside capital often becomes famous in the short term but often at the expense of their wealth over the long run.
Avoid chasing low-margin revenue that will suck up your cash and force you to sell shares. Instead, focus on your product or service with the highest margin and best cash flow characteristics because those offerings allow you to grow without diluting your equity.
If you found this article of value, then feel free to read through two other series we’ve published recently:
- 8 Key Drivers Of Company Value That Every Business Owner Should Know
- Unpacking The Subscription Economy
If you want to see how your business scores in “8 Key Drivers of Company Value” right now, take 15-minutes to complete this survey and you’ll get a comprehensive 25+ page report benchmarking your business against its peers, plus 49 tips on how to improve those 8 key areas.