In an era of billion dollar funding rounds for something as simple as an ephemeral picture sharing application, its apparent that silicon valley is eager to put money in the “next big thing”. Generally speaking, start-ups usually fail from lack of, or misuse of their capital. This creates the misconception that all funding is good funding. However, there are some cases where funding may actually hurt your business. Here are a few reasons why:
Make Every Dollar Count
Plenty of young adults still love eating out with their parents these days. The reason? They don’t have to pay for it. When it comes to spending their own money however, they tend to be a lot more frugal. This same concept applies to starting a company. If you are forced to use your own money, you tend to make more money conscious decisions and tend to make every dollar count. People are always more careful with spending their own money than with someone else’s. This will help you keep your start-up “lean” and will force you to focus on building out your core product.
Give up Pieces of the Pie
Everything comes with a price. When you decide to accept funding for your start-up, depending on the style of funding, you will nearly always have to give something in return. Often times you’ll give up a percentage of your ownership to the investors. The earlier you accept the funding, the riskier the investment, hence more of the company you are giving away. If you can get that next 1,000 or 10,000 customers from turning up the heat and hustling rather than raising money to scale, then get out and hustle! In the end of the day, the more sweat-equity you put into your business the more “green” you’ll see on the other side. Don’t let accepting funding be the easy way out!
When you accept funding, often times the investors will become involved in your business. Typically they will sit on your board of directors and demand partial control of your company. This isn’t always a bad thing however, often an investor is viewed as a strategic partner, and giving him that control may largely benefit the company. Regardless, this will put more pressure and added stress on the founders. Pressure isn’t always a bad thing, but it may create a rift in the team chemistry if it’s coming from an outside investor. When its your own time and money on the table there’s no added pressure or need to “act” under anyone else’s command. It leaves decision making and creative freedom up to you, which every start-up founder should desire.
The ideology of The Lean Startup, written by Eric Ries, should be followed by anyone trying to start their own company. The basic idea is to build your core product using as little time, energy, and money as possible. Then once you have your MVP (Minimum Viable Product) release it to the market and let them decide whether its desired or not. If it is, go for it, if not make some tweaks and try again. Once you have traction and a proven business model try and grow naturally the best you can. Only accept funding if you think your business really needs it.