If you have a great business idea rattling around in your head but not much capital to fund it, you may be wondering if you should wait until you have more financial reserves or pursue funding.
Though the answer to this question will vary wildly depending on who you talk to, I’ll share what has worked for me.
I’m a firm believer that you don’t need money to start a business. I have nothing against doing so, but it is totally possible to become successful without funding. After all, I’ve never taken funding. I’ve never even spent any money on advertising. Ironic for a marketing company.
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Lately, I’ve been experimenting with further growth strategies, and using funding to fuel that. My choice of funding was a business credit line. That way, I still own 100% of the company, I don’t have to report to anyone, and I can use as much or as little of the funds as needed, always. I don’t have to go find another source time after time after time.
Here are some of the problems I see with venture capitalists (VC)/investors:
They can limit your autonomy
I’ve largely avoided investors because I didn’t want to make hard decisions between what I felt was right for the company versus what someone else thought was right. Sometimes you just want to take a day off or make a dramatic pivot in strategy. Hard to do with investors.
They don’t like change.
You might have a rock-solid plan for your business, but that can all change once you see how the market responds to your product. The normal course would be to go back to the drawing board here and make necessary adjustments. But investors don’t usually like adjustments.
If you do take on funding, my vote would go towards pursuing funding to grow your company, not start it. Get it going first and get a feel for the market. Then pursue funding once you have worked out the initial kinks.
They can lead you to an endless, anxiety-driven cycle.
Once you start taking funding, you need more, then more, then more… You can’t get off the hamster wheel until you sell. And if you don’t sell? This happens:
Emoov was one of the largest online real estate agencies in the UK. I followed their journey closely as a friend of mine was an investor, and we also did their SEO from roughly May of 2016 until January of 2018.
By 2018, they were valued at £100m :
By October 2018 they were broke.
(Watch the founder’s video at the bottom.)
Why? Because they needed VC funding to feed VC funding before they could get the next round of VC funding. Unfortunately, one of the sources of funding didn’t come through on time, which caused everything to collapse. Seemingly, very literally, overnight.
Venture capital isn’t inherently bad, and it works well for many people. Just make sure that you manage it in such a way that you limit the potential liabilities.
Beware of High Startup Costs
Many of the people who turn to venture capital do so because they need a lot of funding for their business. Think twice about businesses that blow through capital quickly, however.
An experience my wife and I had with a business taught me the value of caution here. Here’s the short version:
- My wife is a nail technician
- I built her a salon
- Grew it
- It was successful, but…
- For every $1 we’d earn at the salon, it would keep me from earning $2 with my business, SEO National
- Physical inventory requires your time
- Lots of manpower requires your time
- Internet-based businesses don’t
We were fortunate to be able to grow that business and sell it for a profit, but seeing that stark contrast made me stick to internet-based businesses. But that’s also where my passions are, so I followed the opportunities within that arena.
Prepare for a Sell
If you’re thinking of starting a business, the thought of selling your business is probably far from your mind. But you should always develop your business with a thought to selling it at some point in the future. This may be eons away, but it’s still smart to prepare for this eventuality.
There was a venture capital company that was interested in acquiring SEO National about five years ago. They wanted to roll it into the purchase of another marketing company to have a full-service agency. I ended up backing out of the deal because I didn’t like the negotiations, but I learned two really valuable concepts:
- Business buyers want to come in, take the keys, and go.
- On their way, they want to know where the fire is so they can pour more fuel on it to grow as fast as possible.
If and when you sell your business, you must have these two things in place to maximize your exit:
- Documented processes
- Consistent source of scalable leads/customers
You could likely build and sell a small business that has the two items above, but no funding, for the same or more money than a bigger business that took on funding but was just a rapid, growing mess.
Some people will agree with my thoughts on business funding, and others will disagree with everything I’ve shared. The specifics may differ for you depending on the type of business you want to start and your personal financial circumstances. Regardless, I’ve learned these key, overarching concepts through direct experience and believe that they can make a big difference in the success of a startup business.