Many investors still have not abandoned their desire to take a quarter, half, or even more of a startup’s shares—and gain control of its management—simply because they are making an investment.

A type of investment offer I have been hearing for years in our entrepreneurial ecosystem always reminds me of a line about dividing up the spoils in the Stone Age sketch of Yasaklar, staged by Devekuşu Kabare in 1983 with Metin Akpınar and Zeki Alasya: “Give me half of that.” Fortunately, our entrepreneurial ecosystem left its Stone Age behind long ago. Yet we have somehow failed to leave that Stone Age investment offer behind. Many investors still want a quarter, half, or more of a startup’s shares and control of its management simply because they are supplying capital. In reality, such large equity demands, especially at the earliest stages, can be among the most serious obstacles to the rapid growth and rising valuations of which startup founders dream.

An Approach That Can Destroy a Company

These offers reveal an inadequate understanding of how startups grow and acquire value, both in theory and in practice. Notice that I am not asking how an ordinary business grows; I am asking how a startup grows and increases its valuation. Those are different questions. Some investors bring habits from traditional commerce and the confidence that accompanies wealth, without suspecting that what they know may not apply to this type of company. They fail to anticipate what happens when a founder becomes a minority shareholder in their own venture from the outset, or how that affects the business over the medium and long term. Because being a minority shareholder in traditional businesses can sometimes be financially disadvantageous—at times exacerbated by unethical conduct—these investors seek control rather than a minority stake. In doing so, they may unknowingly undermine the business or prevent it from growing.

Very few of our wealthy businesspeople made their fortunes by building a company that made one product better than anyone else in the world and then selling it. Consequently, the business plans of globally ambitious startups may not seem credible to them. Some entrepreneurs and investors alike assume that one investment can meet all future financing requirements. They may fail to understand how much money global expansion demands. For investors accustomed to traditional deals, growth appears to occur on its own; the business need not reach world scale. The activity is not necessarily based on technology or knowledge-intensive capabilities, so capital seems more valuable than expertise. Whoever provides the money takes the lion’s share. In that setting, it appears perfectly normal.

Knowledge Is More Valuable Than Capital

But in startups of this kind, the knowledge and ingenuity that create innovation are worth more than the capital itself. That is precisely why investors invest. The ambition to reach global scale is another reason. Achieving that ambition, however, requires raising substantial amounts of money and investing rapidly. Without such capital, the company cannot grow. With high interest rates making funding scarcer in global markets, the number of investors capable of providing it is smaller than before. How will an investor who has taken control of an early-stage startup finance the increasingly large rounds that follow? Other investors may lose interest in a venture in which an industrial group or wealthy investor—not the founding team—holds a controlling stake. Its valuation may then stagnate. If the valuation is not increasing, what will motivate the controlling investor to keep committing ever larger sums with conviction? Will they have enough money? Most likely, at some point the investor will stop investing, or, as the sole source of capital over several rounds, dilute the founder further and bring the venture to an end.

A Better Investment Offer

Instead of demanding majority ownership or an initial stake so large that it will soon become a majority, the better approach is to offer financing for roughly 5–10 percent of the company. When a founder uses that money successfully to achieve milestones, investors can continue to participate in subsequent rounds, bringing other financiers alongside them. This is key to growth and rising valuation. Later rounds should also attract funds able to provide the much greater capital required to build a global business. New investment rounds perhaps every 12–18 months can then multiply the company’s valuation as market growth accelerates, allowing earlier investors to see the increasing value of their stakes in real transactions. Without this progression, an investor hoping to profit from startup investing may instead prevent the venture from increasing in value, leaving a promising seedling permanently stunted.

The Investment Ladder

Understanding this logic and strategy requires understanding how startups grow and how their valuations increase. Through technological innovation, startups typically seek to differentiate themselves in a particular market segment, establish near-monopoly leadership, and grow rapidly among customers in that segment worldwide. If a startup can convincingly claim—and demonstrate with real evidence—that it solves the needs of a globally widespread customer segment much better than anyone else, funds and strategic investors may invest substantial sums in anticipation of its future market dominance. The startup can then deploy that money intelligently and quickly, achieving explosive growth over a few years. Its valuation may multiply along the way. Because committing all the money at once would be very risky, and innovation-based businesses involve uncertainty, investors of different sizes provide capital in stages, forming an investment ladder. Those who invest along this path can realize substantial returns from rising valuations without waiting for the company actually to become a global monopoly or phenomenon.

If an industrial company or wealthy individual buys half of an early-stage venture, that investment ladder may collapse. The startup’s valuation may fail to increase not because the business lacks growth potential or the team is incapable, but precisely because of the investor’s ownership position. Instead of multiplying the company’s value and selling the stake at an attractive multiple, the investor may end up with a small or midsize business—perhaps one abandoned by its founders—or an investment that has failed.