Quora Answer: If You were a Billionaire, Why Would You Seek External Funding Sources for Your Projects?

The following is my answer to a Quora question: “If you were a billionaire, why would you seek external funding sources for your projects, when you can well afford to fund them yourself, if the product is viable and the returns would be profitable?”

One of the principles of business is that if you have the knowledge, you should not use your own money.  And if you have the money, you should take advantage of other people’s knowledge.  And then, there are people with the access and opportunities.  I do not use my own money for projects, because since I have the knowledge and opportunity, I should not be the one providing funding.  The idea behind this is twofold: spreading the risk, and creating prosperity.

By getting other people to fund the project, I have mitigated my financial exposure and spread the risk.  There is no such thing as a sure win.  Depending on how I structure the holding company, I never lose control of the business.  This may involve creating different classes of shares with different voting rights, to not giving out a majority stake.  So, I have, in effect, got other people to fund my business, at no real loss of control.

Sometimes, we seek funding not because we need the money, but we need a stakeholder’s commitment.  Getting funding from an influential entity in a specific market would guarantee the opening of that market, for example.  Getting the funding of banks opens up avenues to new customers.  When you owe the bank a million dollars, it is your problem. When you owe the bank a hundred million, it becomes their problem.  It will be in their interest to open up their network of potential customers and collaborators to ensure that your company succeeds.

Arranging funding from external investors also allows you to fund your own business through other entities that may not be obviously controlled by you.  This is for the purposes of tax mitigation.  If you own a billion-dollar business by yourself, and you fund everything, the tax authorities can easily guess your taxable income.  That is not very clever.

We also want to spread that prosperity around our network by offering them an opportunity to make a profit.  This creates goodwill that can be leveraged in future.  When people make money with you, they will let the world know.  This makes it easier for you to obtain funding for future, riskier projects.

Finally, being a billionaire does not mean you have the liquidity to pump in the sort of money needed.  Most likely, that wealth is tied up in other investments and illiquid asset classes such as property.  You could leverage on this and borrow from the bank, but why borrow to fund a business, and pay that interest, when you can get other people to put their own money in and bear the cost?  There is no need to leverage your assets for something risky.