Does Your Start-up Need Funds?

While the answer to this question may seem obvious to many of us, it may not be so for some entrepreneurs who have been bootstrapping their businesses to date.

Some entrepreneurs have an inherent desire to see their business grow and succeed without relying on external funding and relinquishing control over their business.

While raising funding is an ongoing challenge for many start-ups and a much-needed impetus for survival, start-ups can also explore other viable options to reduce their dependence on raising external funds.

But before you can explore those options, let's take a moment to look at whether you really need to raise funds and the pros and cons of raising funds.

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Key Takeaways

• Not all fundraising is bad. Venture capitalists also bring in a lot of connections, expertise, and experience that can help grow your business faster than you imagined!
• Your business can grow without funding, though the pace may be slower than others.
• If you raise funds, your investors may pressure you to sell your online business or go for an IPO even if you are not ready for it!
  

Why are you raising funds?

Trying to be one-up on your peers or having something to boast about during your next alumni meeting isn't a good enough reason to do so.

Historically, not all companies need to raise external funds to grow their business as soon as they launch. For example, Jeff Bezos built Amazon in 1995 with $250,000 funding from his parents and opted for an IPO only in 1997. It also invested all its revenues for 14 years in further growing the business.

As a start-up, it makes sense to raise funds only when you have a product/service that has solved a particular market need, and you need to scale up to make it commercially viable.

A perfect example of this case would be Uber, which solved a specific market need but needed to ensure it had enough cars on the road to make the business viable. Without enough vehicles being available, customers would need to wait longer, due to which they would opt for a taxi instead of Uber.

Not all fund-raising reasons should, however, be the same.

A case in point is WeWork, which scaled its operations without preparing a viable business model. As a result, today, both its IPO and business model are considered a failure, even though it scaled up rampantly across the globe on what seemed to be a very profitable concept.

So while getting $10 million funding for your business may be a good ego boost, as an entrepreneur, you need to consider whether you really need it.

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Pros of raising funds for your start-up

It's all about the money.

No matter how big your idea is, you need to give it a solid base to take off, and that's where having money in the bank helps, in a big way.

Whether using the latest technology, hiring the best talent, or reaching out to customers, everything needs money, especially in the initial stages when you are trying to put everything together.

Raising funds will also help you go to market and scale up faster to become a dominant player in the market.

Getting funding also increases your standing in the market and attracts the attention of other investors, improving your ability to raise funds in the future. After all, nothing succeeds like success, be it fundraising.

If you are planning to raise funds, then do check out this blog: How Venture Capitalists Make Investment Choices?

Cons of raising funds for your start-up

One of the biggest fallouts of raising funds is relinquishing power to others.

As investors work towards safeguarding their money, you may be obliged to seek their advice before taking any steps that affect the business. However, start-up owners are hesitant to do that, which could be a bone of contention between the start-up owners and investors.

The more the investors, the more pressure start-ups face to succeed and sell out, even though they may not have realized their full potential. A suitable case in point is Instagram, which was sold to Facebook for $1 billion in 2012 and was valued at $100 billion, just six years later in 2018.

Whichever way you look at it, both raising and not raising funds have their own set of problems.

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That brings us back to the question, does your start-up need to raise funds.

It's not that your business won't succeed without fundraising, but then your growth will be slow-paced. It could also lead to your VC-backed competitor moving ahead of you in the race, and you wouldn't want that, would you?

While it may sound pretty heroic and tough to continue bootstrapping your business, it shouldn't be done at the expense of your business, which is usually the case given the high advertising and marketing costs associated with attracting new customers.

Another question that start-up owners need to address is how much difference the funding would make to their business. Will it help them increase their market share substantially enough that even parting with a stake in their company would not make a big difference to them?

Would the funds help them grow at a 10x or 20x speed compared to the pace their business is currently growing through bootstrapping?

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If you are looking for inspiration to strike out on your own without external funding, you need to just look at Mailchimp, SPANX, Basecamp, and Patagonia. Start-ups that made it big on their terms without relying on external investors.

Another deterring factor for raising funds would be the colossal amount of time and energy you need to invest in it. It's about consistently hitting all the metrics put forward by investors and still waiting for their approval.

All this can be very distracting, especially when you focus on growing your business.

If you've got a product/service that the market wants and customers are lining up for it, the added pressure from investors can sometimes be overwhelming and cause burnout.

When you launch a new business, you've got to be right there, leading from the front, addressing customer problems, and innovating solutions to meet their needs; that's what you started the start-up for, after all!

But, with cash reserves fast draining and vendors lining up for their payments, maybe it's time your start-up starts looking at raising funds.

Put yourself in the other person's shoes

When faced with a perennial question, with the answers hovering between a yes or no, it's time to take a look at things from a different perspective.

If you are a well-funded business, think about what would a bootstrapped owner do. Which are the areas they would cut costs while at the same time working out ways to upsell their current products/services.

Do you really need those weekly team lunches or to invest in the latest playbooks for your team? The lessons are easy; the more frugal you are, the better your chances of survival.

If you are a bootstrapped business, look at ways funding could boost your growth. Will you be able to achieve 10x or 20x of your current sales? Would it impact your operational efficiency and make you profitable faster? How could you be a better player in the market and gain maximum share?

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All's well, that end's well

This legendary quote by the famous playwright William Shakespeare aptly sum's up a start-up owners' journey as he works his way through improving society and the way we do business.

There can be no right or wrong answer to the question, "Does your start-up need funds? For the simple reason, each business has its own merits and strategy for growth.

One of the success stories that come to my mind when we talk about grit, perseverance, and innovation is that of Canva. The founders of Canva kept going even after receiving more than 100 rejections from investors.

Similarly, every start-up owner needs to decide for themselves the path they will take to make his business a success. While the journey may be longer than others, the end result matters.

If you are looking for inspiration, to keep working on your start-up, then I suggest reading, The 10 Best Books For Aspiring Entrepreneurs in 2022.

If you love the insights, I shared in this article, share them with other start-up owners who may find them helpful. I'd also love to hear your thoughts and comments on this article, so do write to me at [email protected]