From Kickstarter to IndieGoGo, it sometimes seems like every single company is looking for a way to get funding, sometimes long before it even has a complete business concept. Is this really the most successful business model?
Businesses are built on growth, not funding targets
While you might need to raise a particular amount of money to get a business off the ground, that’s not how you’re going to be able to continue to run your business. You need customers, profits, year over year growth, and strategic reinvestment. Hitting a venture capital funding goal might make for a sexy press release, but it won’t help your business stay open after the Kickstarter closes.
Venture capital encourages us to look at the wrong role models
Square, Dropbox, Slack, and Uber all had funding rounds, so that’s got to be the right way to build a business, right? After all, those companies are all making millions.
The problem with this concept is that it’s trying to bottle lightning. It’s deciding to wear nothing but blue jeans and black turtlenecks and waiting for a computer empire to descend from the heavens. Yes, that is one of the idiosyncrasies Steve Jobs displayed, but his clothing choices were not why Apple became successful. Instead, Steve Jobs possessed a single mindedness that allowed nothing else into his focus, and because of that, he refused to spend mental energy on decisions he found to be irrelevant – such as what clothing to put on in the morning.
There are lessons to be learned from the biggest of the big, but waiting on venture capital to start your successful business is like waiting for a lottery ticket to solve your debt problems. It could happen, but you’re better off getting a better job or getting your spending under control.
Funding rounds are addictive
Companies go after venture capital, thinking that it’s easy cash. They get a big influx of funds, and then they expand their business. But because they expanded due to a cash infusion, not through natural growth, it’s almost impossible to project where revenues will be a year down the road, which means that the business will never be the right size. And then, instead of cutting into the expanded business, it seems logical to just do another funding round and get more cash. After all, you’re almost there.
But running a business this way never gets you where you want to be. For a business to be self-sustaining, It needs to operate under its own steam. It can’t do that while you’re constantly collecting cash to make up for your shortages. Amidst the allure of venture capital, startup missteps to avoid include neglecting customer acquisition strategies and relying solely on funding rounds for growth, as this can lead to a vicious cycle of dependency that hampers long-term sustainability.
Focusing on venture capital can disadvantage your business
Whether you need to pay back fees from venture capital, have to consider investor input when you redetermine your business direction or struggle to build inventory after you send products to your backers, starting with a round of funding can have a negative impact on your business down the road. 99% of successful startups are self-funded.
The Hidden Costs of Venture Capital
You’ve developed an innovative product and backed it up with a robust business strategy. However, the moment you introduce venture capital into the mix, your share of the pie starts to dwindle. This isn’t just about semantics; equity dilution is a genuine concern that can alter your level of control over the business you’ve painstakingly built. The point here isn’t to deter you from seeking venture capital, but to enlighten you about the trade-offs involved. It’s not merely about acquiring additional resources; you’re parting with a slice of your vision. That slice could expand with each subsequent round of funding, reducing your influence over key operational decisions.
Switching gears to the boardroom, securing venture capital often entails offering board seats as part of the arrangement. Seems benign, doesn’t it? But reconsider. These positions are more than mere placeholders; they’re pivotal centers of authority that can sway the course of your enterprise. While your focus may be on driving innovation, venture capitalists might have their own set of goals that don’t necessarily align with yours. It becomes a nuanced interplay between safeguarding your entrepreneurial spirit and meeting the expectations of your financial backers.
So, before you eagerly grasp the next investment opportunity, pause and ask yourself: Are you prepared to relinquish some of your steering power? Because reclaiming it later could prove to be a monumental challenge.
Bootstrapping forces you to commit
If you are waiting for funding before you get started, it’s easy to stay in the development phase indefinitely. It’s easy to tell yourself that investors just don’t like you, you just aren’t connecting with your target demographic, or most damaging of all, it just wasn’t the right time.
When you bootstrap your business using the lean start up model, you’re forced to work with the amount of cash you have on hand. You need to make tough choices and keep your business the right size. You might need to learn some new skills until your business is successful enough for you to outsource the marketing, or IT, or customer service.
You will be forced to look at exactly how much you want your business to succeed. If the answer isn’t “more than anything else,” you’re probably not going to make it through the first few years anyway. Better to know that before you’ve spent the money.
There certainly are times when venture capital is the right way to move forward. If you’re raising a very specific amount of cash for a very specific target, such as expanding a particular product line or moving into a new market, venture capital can help. But venture capital should be your answer only after all other reasonable funding options are pursued.