There is a common assumption that you need to 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 money and time. Some businesses seem to simply require outside investment, particularly if they require expensive equipment, substantial inventory, significant labor, or the like. However, most business ideas can be tweaked into smaller startups without large capital needs and grow into the final business over time.
There are pros and cons to getting outside capital for a startup, and the decision to launch an entire business idea or modify it to fit your own budget can be down to some of these factors.
Advantages of raising external funds
Money
Obviously, the main 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 problem staying afloat during the early stages of operations.
Value Added Investors
Some investors include their own experience in the investment agreement. In these cases, they are essentially paying you to mentor them.
Share responsibility and risk
Bringing in partners redistributes the risk, and potentially the responsibilities, of entirely on your shoulders to 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’ve already secured a significant investment.
More aggressive projections
Knowing that you’re starting out with enough budget to meet all of your best plans can be the motivation you need to swing and aim for a home run out of the park.
Disadvantages of obtaining external financing:
Lost of control
Once you split your capital with an investor, you have no ability to fire them directly. Depending on the deal you make, each decision may require a discussion with the other person. And, the more you accept as investment, the more power they will want and wield.
Limited Exit Strategies
In the same vein as before, once you partner with an investor, it’s no longer up to you when and how you exit the business. You can’t always pass it on to your children, or sell it to an interested businessman, or just close the doors.
altered focus
With plenty of cash in the bank before launch, you’re more likely to focus on spent money that making money…maybe not the best culture for a thriving company.
Overconfidence
Confidence in your idea and abilities is essential, unwarranted overconfidence is simply dangerous. Receiving an early influx of cash in such a way that there are no problems associated with getting it up and running can develop a culture of waste and waste… an attitude that is difficult to overcome once the cash is gone.
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 result of bringing in partners or taking out large loans. If you’re comfortable with the downsides of outside funding, you can get your idea to market much faster. Otherwise, it may take longer to take off, but you’ll 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.
