An important part of every business owner’s journey is finding ways to sustain themselves and their business. Some entrepreneurs opt to use their personal savings, some go to friends and family, and some choose to raise funds from external investors. In this post, we will focus on the most popular option these days – raising external funding.
Getting investment is like a fairy tale come true for most startups. In the startup sphere, this is a high rated accomplishment. Even more telling is the media attention funded startups get and how success is usually measured by the funding amount raised. These are not the only advantages of external funding. It definitely helps that startups are able to do more and stay ahead of the competition when they receive significant investment. However, it is equally important to know the other side of the story; the reality of what it means to take venture capital funding.
Regardless of the stage of investment funding a startup receives, it is important to understand the implications of exchanging part of your business ownership for someone else’s money. Sometimes, money that might seem like a godsend could also have adverse effects that you have not considered. Here are some things you should be aware of as you consider raising external funding:
Choosing Where to Spend Startup Resources: Product or Funding
If you ask funded startups how long it took to raise investment, they’ll probably tell you no less than six months; and that’s for the lucky ones. The fundraising process requires a lot of effort, time and resources that can take a toll on even the best of teams. All the resources spent preparing and delivering presentations, making phone calls, attending meetings with potential investors, and negotiating to close a funding round means not enough resources spent on actually running your business. To make sure your business does not suffer, it usually comes down to a deliberate choice: do you satisfy all your potential investor’s requirements or do you focus on your customers’ needs?
Aligning goals and setting milestones
There’s this saying that “he who pays the piper calls the tune”. It’s a similar situation once you receive external funding, especially if the piper and the payer have differing goals. Sometimes, what your investor wants might not be what you want. While your investor might just want to cash out, you may be more interested in discovering something innovative and groundbreaking that takes more time to be profitable. When the typical investor gives you money, it’s because he wants a significant return on investment...and soon. To ensure this happens, there would be an agreement on what to achieve and what milestones to meet – e.g. number of returning monthly customers, monthly revenue projects, and so on. As a business owner, you are ultimately responsible for meeting these goals so it's important to ensure that you and your investor(s) see eye-to-eye.
Constant Communication and Managing Expectations
The moment your startup gets funded, expectations go through the roof. Whereas, before all you had to do was have an informal conversation with your cofounders (if you have any), now, your investors want to know your every move. So, in addition to the money you receive, you also need to cultivate a good relationship where you provide updates to your investors. To manage expectations and maintain good relationships, it is important to agree on what information is most relevant to your investor and how often this information should be reported.
Beware the Resource Waste Temptation
Sometimes, the appeal of more money might make you prone to bad acquiring decisions. For example, a non-financial startup might hire a whole in-house accounting department to handle their accounts because they have the money. In reality though, it might be more economical and efficient to outsource to a professional or. Basically, there is a higher temptation to spend more when you get funded; try to avoid it.
Bringing investors on board often has legal implications such as share ownership and board membership. It's important to ensure that you understand these details and that you seek legal counsel (ideally different from those advising your investors) to guide you through the process.
So should you take external funding? The choice is yours to make. What’s important is to understand that every situation is unique and you, as an entrepreneur, must determine what works best for your business. Be really sure you need the funding and have a carefully laid out plan for how you want to spend it. And keep at the back of your mind that although it is your startup, it is not your money. And the owner of the money is, in reality, the owner of your startup.
Have you had any experience with investors? Share your experiences with us in the comment.
Wondering whether to raise external funding? You don’t have to think through it alone. Let’s help you. Contact us for a consultation. Here’s what some of our clients have to say. Our goal is to empower businesses like yours by providing them with the tools and knowledge necessary to drive high business performance.
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