There is no one size fits all here, all businesses, stages of evolution, markets and needs are different as are the needs and goals of the founders and owners. In this article, we are going to take a very general look at the subject of fundraising and look at the pros and cons to help you think about your own business and get some idea as to what could be right for you. Most importantly we want to examine whether you should be fundraising or not.
The first thing to do is really question whether you NEED to raise capital
The first thing to think about is why you are thinking about fundraising, do you really need the extra cash? If you have already launched your product or service and are seeing results and growth you could consider fundraising to accelerate that growth, open more outlets or hire a bigger team or expand into a new market as a few examples.
The classic catch 22 fundraising situation a lot of startup founders fall into
The most common scenario is as follows. You have a great idea for an app or SAAS startup. The idea makes sense and has the potential to succeed. The problem is you don’t have the resources to pay developers to build the product. You go out looking for investment on the back of the idea and in most cases will fail to raise capital unless you go for friends and family or you are well known and have a solid track record of successful exits. In this case if you can prove that you already built and successfully sold a startup or two, ideally VC backed, it will not be very hard to raise the funds to get the project off the ground. If like most people you don’t have access to friends and family investments or a track record it will be very difficult if not downright impossible to get a VC to invest at the idea stage. Probably the best option here would be to look at getting accepted into an accelerator program.
Fundraising can rob you of time and energy when you need it most
Fundraising is a time-consuming and energy-sapping business. It comes with highs and lows and all the time you are forced to take your eye off the ball in order to go out and secure funding. If you have a big enough team and sufficient resources it´s maybe not so bad but in most small companies with a single founder or a few founders who are already overstretched fund raising can really sap your energy and resources for perhaps a zero gain or worse make a mistake and end up with the wrong funding and partners and have to pay the costs further up the road.
A fictional example of a SAAS startup considering raising outside capital
Let´s here look at an example, perhaps a SAAS (Software As A Service) startup with a single founder or a couple of founders and maybe a very small team boot strapping their way forward. It´s all hands on deck and all energy is going towards creating the platform and getting it ready for the first users or the first viable version is live and it´s now time to go out and get paying customers.
At this exact stage, you are faced with two clear choices, you could put your energy into getting paying customers and thereby start to generate income and users or you put some of your available energy into raising funds. The issue with the latter is that you will inevitably have a harder job raising funding if you cannot show enough traction and if you do find investors who have an appetite for more risk you will have to give away more equity. If you do manage this you have the advantage of having another or more stakeholders who can maybe open doors or provide advice and the benefit of experience and another set of eyes which can be priceless however on the flip side you could lose some control and cannot do things quite as you like, this can be a good thing or a bad thing.
If you do not take the fundraising route just yet and continue to bootstrap assuming you have enough resources to stay alive you can give everything you have to get your project off the ground and gain that essential startup traction.
The advantage here is that all your effort is going towards getting users/customers on board and hopefully even generating some income.
Depending on your business setup and service offered you could theoretically grow organically for a while without the need for external funding. To me, this is the holy grail.
You end up in a situation where you can prove the need for your product or service, iron out bugs, stay lean and grow your financial needs steadily and therefore understand the financial mechanics of your business a whole lot better.
What I mean by this is that you think about every cent you spend, every person you hire or take on board when it´s your own money and limited in supply.
If you suddenly get a sizeable investment you have an influx of cash with the pressure to deploy it fast. You may make mistakes on where you spend it whereas if you grow a little longer with your own resources you get a better feel for how your business actually works and what you really need to sustain it and grow.
If you at this stage decide to look for external funding you should be in a much stronger bargaining position and therefore potentially have to give away less equity and depending on your business model you may be in a position where you do not ´need´ extra funding and so can be a little more relaxed in your quest for funding.
Raise capital when you don’t need it, i.e. are not desperate for it!
In my experience and I´m sure I am not the only one to say this, raise money when you don´t need it with the emphasis on the word need.
If you are running short of cash and need cash to stay alive you will not get good terms. If you are relatively self-sufficient and can continue growing albeit slowly without funding you are much more in control and can more easily choose investors and investments that will work better for you and your company.
So the takeaway from this is in my opinion, don´t go for funding too soon, focus first on your product, service, business and get that right and once you are in a strong position, raise money from a position of strength, not weakness