Everywhere you look in the entrepreneurial press – blogs, magazines, news stories – you see a lot of coverage of companies who acquired millions of dollars in startup funding, second-round VC financing, and angel investments. So it’s no wonder a lot of new entrepreneurs believe that bringing in outside funding is a necessary step in the startup process. Visions of nice offices, a hefty payroll account, new equipment – and let’s not forget a salary for the founder – can further cement an entrepreneur’s desire for someone with deep pockets to back their new venture.
But is acquiring outside financing always necessary or even a good idea for every startup? No way. In fact, focusing on getting investors can actually tank an idea that might have otherwise flourished. How? In our new book, Small Business, BIG Vision: Lessons on How to Dominate Your Market from Self-Made Entrepreneurs Who Did it Right, my brother Adam and I devote a chapter to the idea of stepping back from the buzz around getting investors and looking at what your company really needs. There are advantages and disadvantages to brining in outside financing, and the disadvantages can often outweigh any gains you might realize.
Here are three potential drawbacks to going after early stage funding:
1. Fractured focus. When your company is first getting off the ground, it needs you. It needs care and attention in every aspect of the business. If you’re more worried about getting funded than building your company, you hurt yourself in two ways: First, you aren’t focusing on nurturing your new company, which will make it harder to launch successfully – with or without funding. Secondly, because you aren’t as focused on the core of your business as you should be, the irony is that you’ll hurt your chances of getting funded anyway! So even if you decide you must get financing, make sure that quest doesn’t take over your life and lead you to neglecting your business.
2. Discouragement. If you present your business concept to investors, expect a lot of rejection. A small percentage of businesses are able to convince early stage investors to take a chance on their venture, and most of those heard a lot of ‘nos’ before getting a yes. For a fledgling business, this can be fairly discouraging. On the bright side, you might get some great advice on making your business better, but you’ll also be told by people who you feel like know their stuff that your idea isn’t appealing. Anyone who goes after funding needs to have a tough skin and believe in their concept strongly enough to brush off the criticisms.
3. You might actually get funded. You’ve heard the saying, “Be careful what you wish for.” Never is this more true than when contemplating brining in outside investors. Right now, it might seem like having an investor for your business would be a dream come true. In reality, there’s a good chance it could be a nightmare. Although there are plenty of stories of companies that prospered and founders who got the success they were seeking, there are also tales of despair told by entrepreneurs who lost control of their companies or were forced to sell sooner than they had hoped, just to get an investor their return. This comes back to what we discuss at length in our book: Make sure you’re looking for collaborators – not just deep pockets. If you must go after financing, a true partner in your success is the only way to go.
Are there business models that will only work with investors involved? Sure there are. But the majority of businesses can get off the ground by bootstrapping, hard work, and passion. And for the founders of those businesses, the payoff, while perhaps longer in coming, will be that much sweeter.
About the author: Matthew Toren is a serial entrepreneur, mentor, investor, award winning author of the book Kidpreneurs, and co-founder of YoungEntrepreneur.com. Matthew and his brother Adam are authors of Small Business, BIG Vision: Lessons on How to Dominate Your Market from Self-Made Entrepreneurs Who Did it Right (Wiley, 2011).