There is a common assumption that you must raise money from outside sources to start a viable business. In fact, the vast majority of small businesses are started solely with the owner’s time and penny. Some businesses appear to simply require outside investment, particularly if they require expensive equipment, substantial inventory, significant labor, or the like. However, most business ideas can be modified into smaller startups without major capital requirements and can become the ultimate company over time.
There are pros and cons to raising outside capital for a startup, and the decision to launch a full business idea or modify it to fit your own budget may depend on a few of these factors.
Advantages of raising external funds
Money
Obviously, the advantage of raising capital is that you have money to spend. All of your initial ideas can be implemented and if your plan is well researched you will have no trouble staying afloat during the early stages of operations.
Investors that add value
Some investors include their own experience in the investment agreement. In these cases, they are essentially paying you to be your mentor.
Sharing responsibility and risk
Onboarding partners redistributes the risk, and potentially responsibilities, of entirely on your shoulders at the proportions agreed between you and the investors.
Presumption of competence
Customers, suppliers and other investors may perceive your business idea as more viable simply because you have already secured a significant investment.
More aggressive projections
Knowing that you’re starting out with enough funds to meet all of your plans can at best be the motivation you need to jump over the hurdles and hit a home run out of the park.
Disadvantages of raising external funds:
Lost of control
Once you divide your capital with an investor, you have no ability to fire them outright. Depending on the deal you make, each decision may require a discussion with the other person. And, the more you accept as an investment, the more power they will want and wield.
Limited exit strategies
In the same way as before, once you partner with an investor, it is no longer up to you when and how to go out of business. You can’t always just pass it on to your kids, or sell it to an interested entrepreneur, or even just close the doors.
Altered focus
With plenty of cash in advance of the bank launch, your focus is more likely to be on spending money that doing money … may not be the best culture for a flourishing company.
Overconfidence
Confidence in your idea and your abilities is essential, unwarranted overconfidence is simply dangerous. Taking an early influx of cash so that there is no struggle associated with starting it can develop a culture of waste and waste … an attitude that is hard to overcome once the cash runs out.
Whether or not to seek external financing, and how much to ask for, is a decision that only the entrepreneur can make. Be sure to consider the long-term results of hiring partners or getting large loans. If you are comfortable with the downsides of external financing, you can get your idea to market much faster. If not, it may take longer to get off the ground, but you will be in the pilot’s seat the entire time. Whatever you do, stay focused on the end goal and don’t let cash problems detract from what you’re trying to do.
