Of all the conversations I had with entrepreneurs, one that stood out the most was a founder telling me that going for external funding as a family business would mean they would have to compromise on their autonomy to some extent.
This brings us to the question– when is the right time to seek funding, and whether or not you should be doing it at all?
The answer differs for all businesses and mostly depends on numerous factors like the scalability of your business, marketing goals, and your specific industry.
In a Quora session with John Mullins, an associate professor of management practice at London Business School, the right time to seek funding is when he says,
“You’ve established that a repeatable formula for getting paying customers is in hand. Real sales, not your uncle or cousin, and not ‘users’ who don’t pay, either. In other words, customer traction is proven, and the funds you seek to raise are to scale up the business.”
He further adds,
“You are concerned that continuing to grow your business without external capital is risky, due to imitation by others, possibly better-funded others. If you’re doing something complicated and have a substantial lead, however, you may, as the wonderful Danish company Goviral did, be able to continue growing your business without ever taking venture capital.”
Before we understand all that, it’s important to understand the basic differences between bootstrapping and funding. Here’s a guide:
What is bootstrapping?
When one starts a company on their own without the help of any external funding, it’s called bootstrapping. In simple terms, it’s running your company on your own money and resources. The majority of startups that are bootstrapped strive to use a lean business model and find creative methods to maximize their output and ROI.
The best thing about bootstrapping is that you will have a lot more autonomy, and there will be no investors who will be part of the decision-making.
Raising funds, on the other hand, entails aggressively chasing investors, often venture capitalists, to invest money in your firm in exchange for stock.
Choosing venture finance can give you the financial leverage you need to pursue your business dreams and achieve financial independence.
This finance strategy also brings in a varied group of people with various ideas, talents, and histories, providing the resources needed to build and move the firm forward and ensuring a strong foundation for growth.
When it comes to receiving funding, are there any pros?
Of course, one of the advantages is that you will have more capital and resources, which can help in the scaling of your business. Numerous companies use the funding they receive to hire a workforce, use it for marketing, and invest in better technology overall for productivity.
Moreover, it’s important to remember that the more capital you have, the more you will be able to take risks and experiment with new ideas.
Read more: List of Companies That Thrived on the Edge
Another major advantage is that, along with the funding that you get, you will also have your investor’s expertise at your disposal. It goes without saying, if you want to thrive in your industry and be on top of the game, you will need to network as much as you can. Apart from guiding you, investors can also help with that.
Moreover, securing funding from external sources can serve as validation for your business concept. It signifies that others recognize the potential in your vision and are willing to invest their own capital, bolstering the credibility of your idea.
The disadvantages of getting funding:
One of the disadvantages of having funding is that you will not be the only one involved in the decision-making process in the company. Now that there are other stakeholders, they will very much be a part of it as well. So, if there is an investor who has invested a large amount in the business, there is a good chance that they will have a seat on the board of directors.
Another important thing to remember is that everyone wants a return on their investment, so you will always be in a chokehold of investors wanting to scale your business. This expectation often comes with the anticipation of rapid business growth and prompt revenue generation. Consequently, there’s increased pressure to scale the business swiftly, potentially before you’re fully prepared, which can result in errors and misjudgments along the way.
Lastly, with each funding round, your ownership share in the company diminishes, constraining your decision-making authority and potentially sparking conflicts among shareholders.
The bottom line is that, in the end, whether you should get funding or not comes down to what you expect out of your business and how you want to operate it.