03 Mar Why Raising Capital For Your Business Could Be Damaging

I’ve been in business for myself now for over seventeen years and in that time I’ve consistently heard entrepreneurs put their hands up and say, “If I had $500,000, I could make this company work”.

The above figure obviously varies between conversations however the theme is always the same, running around trying to raise capital never getting anything started shooting for the big dollars instead of starting small, refining the operation, direction, marketing and ensuring there is a solid market for the business to warrant such a large injection of capital.

Over the years I have been given stern advice not to raise capital and I am thankful for that advice today, it’s forced me to delve deep into refining my skills in financial products, learn to code, graphic design, copywriting and experiment with a few business ideas before approaching anyone to raise funds. I am also a believer in celebrating failures in order to learn from them and get you on a path that will be successful. Convincing investors stump up funds to early on can end up in disaster and potentially damage your reputation.

While it may be financially less risky to fund a company with OPM (Other People’s Money), there are good reasons why not to raise capital from outside investors:

It’s very time-consuming

Raising money at any stage of a business is time-consuming. An entrepreneur should expect to devote almost 100 percent of their mind on pitching to potential investors. This competes with time spent on sales, marketing, finance, and product development. You need some serious stamina, contacts and the ability to take criticism very well. No one loves your business like you do and convincing them is even harder, especially if you haven’t taken the time to prove it yet.

It’s super distracting

The problem with devoting your time on raising money at the start of a venture is that the founders and their team are not spending time getting paying customers that will fund the company in the long term or at least establishing a customer base to predict future growth. Plenty of capital does not guarantee the company will succeed; only money in the bank from customers will prove that.

I am a firm believer that a lack of capital forces an innovative environment, you’re stuck having to come up with ways to find customers, develop products in ways that are cost effective.

It’s ridiculously expensive

Raising money can be an extremely expensive exercise, not only do you need to find the right partner, you can also get caught out using an intermediary (broker) which can cost you up to 12% of the capital raised as a fee.

It’s complicated, in the beginning you need to KISS

Yep, Keep It Simple, Stupid. Having investors in a business will make the running of the company more difficult. Not everyone will share your direction or dream of how the business should evolve and especially how the money is spent. If you’ve raised money in the early stages you can be at serious risk of losing all control before you have time to show that you’re capable of growing the venture.

Too much money makes people stupid

I’ve touched on this above, but it’s worth re-enforcing that too much capital to early can actually make you “stupid”. In other words, you will spend too much money testing strategies that can typically be accomplished on smaller budgets. I’ve even seen an established business that has a niche product throw tens of thousands of dollars at a TV marketing campaign that blasts out to a broad market just because it’s TV! You guessed it…absolute flop.

Most Australian small businesses can start on less than $30,000. Typically, most of the money for starting a business usually comes from savings, family and friends who invest because of a personal relationship with the entrepreneur, not the company. In addition, these people will not try to get involved in the day to day running of the company and will show more trust than an outside investor.

Once you’ve reached the 6-12 months hurdle, if you still need additional funds you can seek to take on debt followed by establishing a strong income stream you can approach outside investors. Approaching funding at this stage will usually result in not giving away such a large chunk of equity.

Of course my comments don’t apply to all capital raising, VC, Angel rounds etc however for the majority of startups and growing businesses, it’ll ring true.

Had any experience dealing with capital raising? Please comment below.

About Leigh Dunsford

I am a small business finance & lending columnist at Loandesk, teaching entrepreneurs what loan options are available to them in Australia, explaining the differences between each loan type & how to position themselves for the best chance of getting approved for their perfect loan. My thoughts have been published on Startupsmart, CEO Magazine, Smartcompany & more...

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