The pluses and minuses of funding your business in different ways.
There seems to be a prevalent belief in the business community that to advance and expand your business, it is essential to have external investment. Raising money, whether through venture capital, seed funding, or angel investment, is taken by many founders to be the default route for growing their companies, but it is certainly not the only path to scaling your business.
Entering into an agreement with external investors is not something to be taken lightly, especially combined with the pressures of launching and growing a new start-up. While raising money through venture capital may seem like the obvious solution to cash-flow woes in the early stages of your launch, it can often raise problems further down the line.
So, what are the downsides of external financial backing, and what are the alternatives?
The drawbacks of venture capital
Before discussing the drawbacks of venture capital, it’s essential to discuss what this concept is all about in the financial industry. Essentially, venture capital refers to financing that many investors offer to startup businesses with long-term growth potential. It usually comes from individuals with considerable financial resources, investment banks, or financial institutions. Also, venture capital isn’t always provided in the form of money. Investors can also give it in the form of managerial or technical expertise.
With all these things being said, there’s no question why venture capital has been a popular method of raising capital for startup companies. But despite its popularity, this form of financing may result in some negative consequences. For example, one of the lesser-discussed aspects of fund-raising from external sources is the sheer time and effort it takes. It may sound counter-intuitive, but raising money from external investors can come at a severe cost. Energy that would otherwise be spent on running and advancing a business is instead diverted towards searching for and securing venture capital.
With such funding rounds being lengthy, time-consuming processes, time that could be invested directly into a bourgeoning start-up is instead spent on acquiring outside capital.
Additionally, raising money in this way will almost certainly require a long-term agreement and therefore a long-term relationship with your investors. While this is not automatically a negative, if those investors are not fully aligned with your vision and your business values, it could open the door to a multitude of problems.
As an entrepreneur, you want control over the direction your business is moving in, but with external investors also possessing a stake in the business, they too will want a say in shaping that direction. If these interests are not aligned, this could result in a loss of control over your company.
Benefits of bootstrapping
Bootstrapping your start-up, where you start a company with little capital and rely on money other than from outside investments and have to self-finance your business through organic growth, may seem like a daunting option, but it can be one of the most financially rewarding ways to fund your growing enterprise.
Ultimately, every business, whether bootstrapped or venture-backed, must have the business basics in place to succeed and to sustain growth in the long-term. This means a solid grasp of the numbers, the right systems and processes in place as you grow, and the right team to achieve your vision.
While these factors are not an exhaustive list, and the specifics will of course depend on your business and the market you are operating within, bootstrapping your start-up means addressing these factors early on, essentially giving you a head start.
Dispensing with the need to raise external investment through funding rounds allows you to completely focus on your business, on generating revenue, and then reinvesting that revenue in line with your vision for the company.
This early focus on making money rather than raising money means you will inevitably be forced to structure your business in a sustainable and cost-effective way, while giving you a far greater degree of control over the direction of both the business, and your long-term vision for it.
Given these circumstances, it’s clear that funding your business doesn’t have to come from external investors. There are ways to help you start a company with little capital with minimal failure risks. For example, if you have an online arbitrage business, you may begin part-time, especially if you have little capital. If you’ve already determined that you’re prepared to take your business to the next level, you can use your growing capital to work on your business full-time.
Putting your money where your mouth is
Having a clear vision for your start-up, while undoubtedly necessary, will only take you so far if you lack the working capital to get your enterprise off the ground. While you may not need millions injected into your company from an external investor, the early stages of development will still require funding, and if you intend to bootstrap, this is likely to come in the form of personal assets.
Whether this is in the form of personal savings, cashing in a bond, or selling off other assets, it is important to maximise how far this form of funding can take you and your business.
This means getting comfortable early on with taking a lean approach to your start-up, and knowing where to cut costs, so you can get revenue flowing into your business as quickly as possible.
Investing time into organic lead generation, outsourcing certain processes, or working remotely if your business allows this, are all ways of cutting costs early on.
Investing time into making connections and building out your support network is also invaluable. Developing strategic partnerships that can provide mutual benefits such as cutting costs or providing services can make all the difference when operating on a tighter budget, as can networking to find potential mentors, customers or simply advocates for your business.
Indeed, external financial backing isn’t the only option to fund startup businesses for capital. There are a multitude of funding options open to start-ups, and it is important to really consider what will work best for your business needs. Bootstrapping, though posing its own unique challenges, ensures you nail those vital business basics early on, with a focus on generating revenue as quickly as possible.
This is not to say it does not come with risk, but by being aware of what those risks are, you can take steps to mitigate and alleviate these sooner rather than later, leaving you in a strong financial position, without giving up equity in your company.
Rob Stone is founder & director of Instaloft.
Making Money Versus Raising Money: Funding Your Business Without Venture Capital