Deciding whether to increase money or trade equity in the business for much needed assistance, could be a tough call.
I raised money and traded equity, but with my venture, I had to make one of the toughest decisions, to build it with some assistance of co-founders. We all decided right away that we’d put in our own money and sweat as equity.
There are some specific reasons for this option, and this explanation might help you determine how to approach the funding of your start-up.
While starting out as an entrepreneur, you won’t have enough cash or experience to start and run a start up on your own, so you may believe it’d be best to include others with more experience to guide you in the direction you’re heading.
This approach would be beneficial only up to a certain extent, as soon you’ll realise that the ones wanting a piece of action have entirely different viewpoints, as to what the start up must become. Not to mention, your start up would no longer be only “yours”, instead, it’d be “theirs” as well. When this happens, even they’ve to be consulted and ultimately the shape of the dream goes on a different path.
In some ways, you’ll feel as if you’re losing control over your original ideas and won’t know how to get it back, due to owing the investors return on investment. Eventually, you’ll start to feel discontented and stifled. Besides, your passion would evaporate once others would start telling you how to run the firm and control its direction.
However, with proper planning, the right resources and tools, and co-founders who share the same vision as yours, you can certainly start your own business without having to raise money and give up equity. If you are having any issues with cash flow, you always have the option of opting for alternate business finance. Both the choices tend to take away a few options.
1. Plan, Plan and Plan.
Planning is of paramount importance, especially when it comes down to using the available cash wisely. Cautious planning would still leave room for flexibility, changes, and perhaps, give a required pivot to the strategy on the whole.
It simply means honing in on what exactly you wish to attain with your business, instead of running with an idea, throwing money, and betting people would love it.
There is no way a start up could work effectively and well, in a confused and disorderly manner. When you hear the word “plan”, it simply means you need to plan, plan and plan more.
Bear in mind to do the careful qualifying and quantifying research, and reach out to the people who you think would benefit from your service, and receive true to life feedbacks. Also, determine the market demand to make sure what you’re doing is sustainable.
So, most entrepreneurs go out and convince investors that they’re able to attain something, when they haven’t done their homework. But, by doing it yourself, you won’t have to worry about paying others and it’s completely on you to see how to make it work, instead of assuming someone else has your “financial back”.
2. Do your research.
So as to plan efficiently, you need to spend a significant amount of time on research, including places where you could get free resources to build your business.
The resources would help you to craft everything, from a proper business plan and legal structure, to agreements and basic operational processes. In return, you’ll be able to do more with less or no money, which previously, you thought required an investor to provide to you.
3. Save where you can.
You may look to save cash in other ways, maybe by outsourcing tech staff and bringing in freelancers, which could help you build the solution you’d envisioned.
Most of the entrepreneurs think that saving cash means doing it all by themselves, or having to trade equity to receive the talent. If truth be told, as you look for various ways not to spend money elsewhere, you’ll have at least some funds available to bring in temporary talents, to do the things you aren’t a professional at.
There are several sites that serve as a marketplace for meeting some of the best talent around, and many of these would stick it out with you, and you’ll be able to give them daily work. This would in turn, be a win-win situation for the both of you.
4. Find the right co-founders.
Having co-founders provides a strategy to avoid funding your start-up, with the help of investor’s money. Whilst, it means you’ll be handing over some control, when you’ll find co-founders sharing similar visions and wanting to take your business on the same path, you’ll have the best of both worlds.
In this manner, you’ll be sharing the workload and dividing up the sweat equity, which comes with bootstrapping, whilst maintaining better control over your strategic direction. You’ll also have built-in emotional support when problems arise, and more brains would be directed towards coming up with solutions to those barriers.
While this might not work for every start-up, it certainly offers a proven way, to work around relying on increasing money. Also, when you’ve got your personal finances in order, build a better credit and tap into several accelerators and incubator programs, you’ll realise there are numerous pathways towards start-up success, instead of hunting down an investor, who might give you cash, but might also take over your business.
5. Beware of scaling too early.
A start-up often tends to go through 2 distinct stages. In the first stage, it processes its proposition with early adopters and keeps on pivoting till the time it has the right product and way of positioning it. In the second stage, the firm takes up the winning formula it has found and thus, scales up.
Investing more money in stage one won’t really help, as spending twice as much on sales won’t produce twice the sales. Also, marketing things that might send out the wrong message, would simply confuse your customers.
Once your start-up has reached stage 2, you can securely start spending a little more. You should also be able to start to build some pointers on how increasing expenditure could increase sales, and gross margin, in order to plan future growth.
6. Raise money when you don’t need it.
Raising capital when you’re running out of cash, is always easier said than done, as seldom does the investor feel positive about your management capabilities or the potential of your firm. If you could raise money, the evaluation of your firm would reflect the reality that you’re in trouble, and you’ll be losing a lot of your ownership.
If truth be told, it’s easier to raise funds when you don’t really need it, like just after a big sale. Nonetheless, many entrepreneurs don’t do this because accepting ownership dilution when it isn’t necessary, is too painful. Often, this is considered as a mistake. There are many stories of bitter regret over running out of funds, but only a few regarding raising too much equity finance.
If you tend to over-fund your start-up, you’ll perhaps suffer some unnecessary ownership dilution as a consequence. However, when you do so, you don’t really have to worry about the monthly cashflow and the journey from funding to exit would be much more enjoyable.
Knowing that you have a war chest to hand, it’d help you in exploiting several opportunities and invest ahead of your growth curve. Though in practice, additional sales would follow quickly, and you won’t have to use all the money.
Of course, it isn’t possible to know well in advance exactly how much money you’ll require. Not raising enough funds signals disaster; whereas raising too much would mean a slightly smaller fortune, especially when you come to sell. However, it’s totally up to you to decide which mistake to make.