When Raising Capital Becomes Risky Business

November 6, 2017

8:30 am

It’s often seen as the ultimate goal for startup founders –get the attention of a powerhouse VC, raise capital to get your business off the ground, then make a successful and lucrative exit. If only it were that simple.

Every business needs cash to operate, but very few actually need it to launch and having the backing of a VC (or even several of them) does not guarantee success. In fact, with every new investment, you’re putting your company on the hook for reaching increasingly higher revenue targets before anyone can realize a healthy return, including you.

If a profitable exit from your company is your dream, you need to think carefully about just how much capital you really need. Stay grounded in reality and contemplate the following harsh truths about raising funds for your business.

The Cash Comes With Conditions

There is no such thing as “no strings attached,” especially when it comes to investment. When you’re bootstrapped, you and your cofounders have complete control in every strategic decision from your next hire to your next big spend. When you introduce an investor into the equation, you’re adding a partner to the business. It’s important to consider what you are giving up to that partner-whether it’s equity, board control, decision making power, or any combination of the three. Their success depends on your success so they’re going to be paying attention to what you do.

VCs invest because they see potential in you, the company, and their ability make a return on their investment. And a good VC will provide you with more than just funds. Their experience and guidance is perhaps even more valuable than their money, but that also means you’re inviting another set of opinions and decision makers into the fold. With that in mind, it’s wise to evaluate who you choose to bring into your company carefully because you could be stuck with this person for a long time. You want partners you can trust and get along with for the long haul.

Money Won’t Solve Your Problems

When a company starts to see growth and gain market share, it often starts to catch the eyes of more investors. Don’t be tempted by the allure of easy access to more funds. Too many founders get caught up in the influx of money and everything it affords them to do, such as, rapidly expand their team, ramp up marketing, buy that new server, and the list goes on. It can be easy to confuse this level of activity with actual growth, and so many founders will go on a land grab, securing round after round of funding.

However, every new funding round dilutes your share of your dream. The more capital you raise, the more revenue you have to make before you can make your profitable exit. Not only that, you are now accountable to more people who are banking on your organization’s success, and that can be a lot of pressure. Mindful growth is the key to long-term success.

A notorious man once said, mo’ money, mo’ problems. And it rings true.

Blinded By the Cash

Most founders start out bootstrapping and that scrappy mentality keeps them disciplined in their purchase decisions. With every profitable month, you’re deciding on your next best spend. Every penny matters so you have no choice but to weigh decisions very carefully. When the bank account is suddenly spilling over, it’s all too easy to increase your burn rate and get careless with spending. You’ll make riskier decisions because now there’s cushy safety net there.

Rather than get swept up by the invincible feeling a huge funding raise can give you, decide on a clear benchmark before you even go for a raise and only take as much as you need to hit it. You’re only trying to get to the next stage, where you can then decide if you need more funds.

Cash is essential to reaching your business goals, but it doesn’t have to come from investors. Beware of the risks and consider carefully why you’re taking an investment in the first place.

Read more advice from VCs about raising capital at TechCo

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Todd Belfer is managing partner of Canal Partners where he is responsible for all aspects of the company including identification of potential acquisition targets, due diligence, financial analysis and final investment decision making. He has a long history of entrepreneurship and has been involved with a wide range of businesses throughout his career, currently serving on the board of directors of more than five companies.

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