The Funding Conundrum: Why Seeking External Funds Might Not Be a Good Idea For Startups

By  |  December 2, 2018

There is a lot of fuss around the subject of raising funding and its importance to a startup’s chances of success. It is not uncommon to have many individuals attach a lot of significance to external financing for aspiring entrepreneurs and early-stage startups, but the stark reality is that most startups never really get to score that much-vaunted venture capital or angel funding. But does an inability to secure funding dictate that startups should never get off the ground? Well, it doesn’t have to be the case.

Here’s a dose of reality; outside funding is not a startup entitlement! It’s more of a perk. It’s all good if you can get some, but if you can’t, it should not serve as a convenient excuse for the inability of your startup to cut it.

Okay, perhaps the media does share some of the blame in what appears to be the disproportionate overestimation of external funding to the growth of startups but aspiring entrepreneurs must recognize that for every Garrett Camp who succeeded in financing his hugely-successful ride-hailing company, Uber, with early venture funding; good-old bootstrapping successes can be cited in the likes of Bill Gates, Michael Dell, and Richard Branson. In these entrepreneurs, a crop of individuals who didn’t get any boost from outside money but waited for confirmed initial success before scaling their respective businesses or going public is wholly epitomised.

It’s kind of the norm for many startup founders to be catching flights and shuttling between cities in the name of wooing investors and raising capital. A good number of aspiring founders are also known to be hopping to random financiers trying to sell their ideas with kickass pitches that took months to put together.

The lobbies of many investor offices are also known to have become something of a makeshift office for many startups who seem prepared to wait it out for however long it takes to make an impression. And for novice entrepreneurs, this is not exactly a bad idea.

The popular narrative now borders around the idea that without outside capital, there would be no growth or success for any business. Some other school of thought may even attribute product development and business expansion solely to the availability of funding. For many, it is believed that raising capital is an integral component of a startup’s foundation.

Now, while some of the above claims may be somewhat justified as raising capital for an enterprise does seem necessary, and investors play a role in shaping many businesses, it will be utterly wrong to assert that external investment is of the utmost need for all startups. 

So essentially, you need not overly fuss about external funding or let it be the factor that ultimately defines how well a business does. Instead, the focus should be on creating self-sustaining companies through the development of products/services that have far-reaching social and economic impact. And if you’re still in doubt, here’s why startups should rethink their need for external funds:

It Could Cause Time And Energy To Go Down The Drain

Okay, so you just launched a business, and the last thing you need is jet-setting and waltzing in and out of offices in the name of getting a financial boost. A new business needs your undivided and undiluted attention on ideas and product improvement. Many startups get caught up in the melee of funding pursuits and inadvertently lose their grip on the important stuff.

If it’s a new business, then it needs to be nurtured. Don’t fall in the loop of fundraising attempts and get consumed by the process, as the business will inevitably suffer. Every hour spent wooing an investor is sixty minutes that could have gone into improving your product and winning over more customers.

Typically, it would require several months and countless meetings to get a couple of investors on board with the program, and this could lead to a term sheet. There could not be a more appropriate example of time wastage for an early-stage startup if the funding pursuit ultimately proves a fiasco. And then belief in your own business and skill set starts to erode from there.

The idea is to get a firm grip on one before chasing the other. Don’t overly fixate on raising funding and scaling when your product is still a long way off from top-notch. Place initial focus on developing a kickass product that will take out the competition and the investors will come calling. Don’t lose precious time chasing a dozen birds in the woods when you can make the most of the one in hand.

Place Emphasis on Revenue Generation

The problem with having access to a fat stash of cash in your company’s account to keep things going for a year or more is that you become complacent and lose sight of what should be the main focus — revenue generation.

Try running a business with little bursts of cash from your personal savings, and you will find yourself making smarter financial calls. If anything, the trepidation that comes with the thought of going flat-out broke will keep you on your toes and nudge you into putting in more work to generate revenue.

It’s not rocket science; it’s pretty much basic that companies tend to make the wisest money decisions when funds are not aplenty. That’s one way to make every penny count.

You Don’t Always Need Huge Funding

Here’s the thing most people don’t know about startups; startups are organisations that are working on a business model. It could even be said that they are organisations that are searching for one. What this implies is that a startup is an entirely new entity that has its sights trained on identifying what it’s future customers are really on the lookout for.

It might do some good for founders to recognise that it is not very wise to invest in a five-member prototype development team when a single freelancer can do a good job of developing a lean version. A move of this nature will better inform on financial needs and help to understand how much outside funding is required if any is required at all. So you don’t go about seeking funds when you have enough to get started.

Future expenditures on product developers, marketing initiatives, technology licenses, access to distribution channels, and intellectual property investments, are mostly unavoidable. But be wary of too many sales executives without a finished product. Also, the initial stages of your business will hardly be helped by huge office spaces and highly-paid employees.  So be on the lookout for those too.

Offering A Seat At The Table To An Outsider

Every other day, there is a news piece breaking somewhere about a startup that has just roped in some amount of cash from an investor in exchange for some amount of equity. Sounds pretty straightforward, doesn’t it? Well, it hardly ever is.

Exchanging some amount of your company’s equity for some cash is not a transaction you make hastily. It has implications. A deal of this nature forges a relationship that will exist for as long as you have the company unless otherwise stated. And this is one call you don’t want to get wrong.

It’s like a business marriage of a sort; the investor will have to be involved in every major business decision, they will have to be kept updated on the business’ progress, you will be answerable to them for losses and other discrepancies. Numerous meetings will have to be called to bring them up to speed, a plethora of excel sheets will be flying around your desk, and justifying actions and arguing moves will become part of your job description. In essence, you lose that little bit of autonomy and control for every amount of equity you hand out. That is why you can’t afford to make a wrong call here.

The very essence of being your boss may be undermined permanently by one wrong move. Therefore, critical thought ought to be given to the whole arrangement before any commitments are made.

For all its perks and benefits, signing off on an equity investment is tantamount to agreeing to share profits. And that is a mild way of saying a significant chunk of the company’s profits ultimately nestles in coffers of the investor who could have done no more than offer you cash. You may have been happy taking the money from the investor initially, but you may not be too pleased seeing the bulk of the money you have toiled for slip away when it’s time to reciprocate.

Worse still, you may even get involved with international firms, and that would imply that the profits raked in by your company find its way into other countries instead of assisting in the empowerment and development of the infrastructure and workforce in your own.

All these drawbacks further underline the idea that external funding may indeed be overrated and bootstrapping is still a good way to go. Securing outside funding may not be the answer you seek and not being able to get one should not stop your startup from taking off and even hitting the heights. Putting your own money in your business does serve up some degree of leeway, and it also gives one absolute control over the finance and creative aspects of the company. It places the onus on you to channel funds judiciously and make wise moves for your firm.

Smart entrepreneurs recognise that disrupting today’s business world is not a frenzied sprint to the finish line, but a marathon, with many hurdles along the way — almost like a scavenger hunt! If you set out on your journey to enjoy the path as well as the destination, it is very likely that you will reach your destination in one piece and in good time. And outside funding is not the ultimate route.


Feature image courtesy: Shutterstock

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