How Raising Too Much Money Can Harm Your Startup
When starting a business, it may appear that the only thing you require is money. You may have the ideal idea, the motivation, and the dedication, but your budget simply won't allow it. When bootstrapping, it's all too easy to look at well-funded companies and feel that getting funding from venture capitalists or angel investors is the only way to succeed. Although there are obvious advantages to obtaining finance to fuel your business's growth, there is also a risk that it can harm your company. In this article, we'll explore the negative effects of raising too much money for a startup.#ThinkWithNiche
It may seem like the only thing you really need to launch a business is money. Even if you have a perfect idea, the motivation, and the dedication, your budget will not allow it. When bootstrapping, it can be quite tempting to look at successful businesses and think that getting funding from venture capitalists or angel investors is the only way to succeed. Raising finance to support your expansion has many obvious advantages, but there is also a danger that it could harm your company.
The entrepreneur finds himself in a position of insufficient funds after making an unanticipated spend and resumes his search for more investors with investment proposals. The cycle repeats until the entrepreneur can sustain his business, at which point the entrepreneur incurs a significant capital cost. As a result, raising too much money without consulting a business professional always ends up leaving small businesses, particularly startups, with no benefit of return.
It may seem strange, but your company's valuation is typically decided by how much money you raise in the early stages. The norm for how much investors want to invest in your firm is 15–30 percent per early-stage round, with the most common range being 20–25 percent.
The most compelling argument against raising too much money in the early phases of your company is that you will almost certainly spend within the constraints of your (now) quite substantial budget, whether or not you need to. If you have money to throw at your firm from the outset, you're much more likely to take a "quantity over quality" strategy. With less money, to begin with, you can concentrate on building your firm at a steady, deliberate pace and addressing those parts that demand attention as they arise.
Of course, you never feel this way as an entrepreneur, but constraints can force innovation. Rather than leading others to complete work, each employee in the organization must complete more work. Because you understand the importance of proof-points in fundraising, everyone in the organization has a very short deadline to meet their goal. Additionally, limited resources drive you to make difficult decisions about what to develop and what not to develop. It drives you to make more difficult decisions about who you'll recruit and who you'll fire.
It forces you to renegotiate your office contract more aggressively and take less expensive space. In a market where wage inflation has been the norm for years, it forces you to keep salaries acceptable.
It will be difficult for the entrepreneur to assure investors of success if they raise too much money based on an uncertain business plan. In any circumstance, investors demand a tenfold return on their investment, and to achieve these expectations, the business owner must increase business turnover by tenfold in the future years. It will put a lot of strain on the company. More money will therefore become the entrepreneur's solution to all of his problems.
Here are five reasons why your fundraising strategy should be modest and patient:
1. Instead letting the investor define the terms, you should define them.
Actually, it's extremely easy to do. The earlier you raise money, the less control you have over the conditions under which you do so.
Returning money to limited partners is the only thought in any investor's head and their sole objective. You're focusing on raising a few million dollars for your firm, but you should keep in mind that the investor you're pitching also has investors who gave them a lot more cash to invest and obtain the best returns.
Your task is to persuade the investor that you will be a future success story and that your product will enable them to get their money back. The risk for that investor is substantially larger if you approach them very early, with no validation or traction. In other words, if you manage to persuade them to write a check despite the considerable risk, they will have the power to do so on your terms. In other words, you are more dependent on that investment than he is.
2. Progress is hindered by a down round. Please stay away from it.
After discussing when to raise, let's discuss how much to raise. I am aware that reading about massive funding rounds celebrates the idea of getting more money than you require, but exercise caution because doing so could put you in a sticky situation.
If you're not familiar, a "down round" is when you raise a new round of funding at a lower value for your business than you did for the previous round. This is bad news for your business because it indicates that, rather than increasing since your last investment, the company's value has decreased.
3. You'll have a better night's sleep if you fail before raising money.
Simply said, the majority of startups fail, and you are an entrepreneur thus you must be aware of the numbers. It stinks when you lose when your own money is on the line. But what if you fail and forfeit the money from your investors? That is on an entirely new level.
As a result of their inability to gain traction, most startups fail before they ever get off the ground, therefore you should aim to do the same. If you are successful, go raise. If you fail, nobody else will suffer because of it.
4. You'll spend less time hunting for money if you have more to show.
Don't forget that as an entrepreneur, time is your most valuable resource. Spending six months seeking for money is the last thing you want to do. Simply put, you cannot. Things will go much more quickly if you invest that time in developing your product, achieving some initial critical mass, and then raising cash.
5. You'll benefit from knowing how to bootstrap when your business expands.
Putting everything else aside, your ability to bootstrap, or start your business without outside investment, will help you become a successful entrepreneur.
When you do raise financing, you will be able to appreciate every penny you spend since you will be able to stay lean and become productive with few resources.
In conclusion, one of your responsibilities as the creator of a young company is to resist the need to raise money too quickly and excessively. Work your way up by doing it at the appropriate moment and at the appropriate firm valuation.
CONCLUSION:- In other words, the more money you make, the less control you'll have over your own company. If you're in the startup game just to get rich and famous, and you're ready to take risks to get there, VC funding might be right for you. If you want a quality company that will develop with you, stay in your hands for a long time, and adheres to your ideas, don't raise too much money too quickly. The entrepreneur must ensure that a proportionate percentage of his business income is distributed to the investor on a timely basis, with a portion of it being kept for future limitations.