Any entrepreneur trying to fund their startup is well aware of the benefits of raising capital. Large cash infusions enable you to reach the market quicker, add more resources, and launch with a burst of speed.
But are there any benefits to not raising capital? What happens when you avoid taking on capital and take your time to build a company?
There are lots of hidden benefits to building slowly, although that doesn’t necessarily mean that it’s the best way to grow. More important is how you consider the benefits of avoiding capital and use them to your advantage.
If you refrain from taking on investors, you keep more equity. It’s an obvious truth that can be difficult to reconcile with the aforementioned benefits of taking on investors. So what’s the difference between a good decision and a bad one when it comes to investment?
Your formative years leave you pretty vulnerable to heavy dilution because you have very few assets to leverage. The further you can push the company ahead without raising capital, the stronger your position will be with investors down the road. Sometimes even getting as far as incorporating the company, identifying the first few key employees, and creating a simple demo version of the product can create a lot more value in a short period of time.
In many ways, the time you spend without capital is an investment in retaining equity later on.
Avoiding capital can also help you find discipline and focus in your venture. Being broke means being disciplined. When you’re broke you can’t afford to work on several disconnected ideas. Singular focus is required to produce cash. If you don’t, you won’t be around long enough to entertain shifts in direction!
Don’t get me wrong – money doesn’t always enable distraction.
But knowing that diversion of focus could keep you from getting your next paycheck is a powerful incentive to stay on task! In fact, being acutely focused, whether you like it or not, will end up saving you an incredible amount of cash along the way.
Bear in mind that when you take an investor’s money, no matter how much of the company you may own, you still have lost some control. Ideally, none of this matters. Your interests are perfectly in line with the investor’s and the two of you live happily ever after.
If only that ever happened.
The interests of investors and entrepreneurs can vary as slightly as the color of your new logo or as greatly as the direction of your entire company. The longer you hold out and avoid capital, the longer you can maintain control of your destiny.
Time spent without capital is time to refine the vision of your company and your product before accelerating the business with money.
Contrary to popular belief, most companies don’t start with a perfect idea and run forever on that single plan. PayPal, who incidentally raised lots of money, went from designing software for transferring money on PDAs to powering payments for eBay auctions. Their change in direction was a smart response to new market opportunities that surfaced after they launched.
You’re far better off raising money once you’ve had time to test your product and vision to ensure you’re raising money for the right strategy. Investors understand that changes are inevitable, but if you go ask for capital in the formative stages, you may look unreliable when you communicate your constantly changing needs to them.
You may also find that your initial approach to launching the company required a lot of capital, yet as your vision evolves, newer approaches require little or no capital. Delaying investment gives you breathing room to work through strategies that may save you money (and equity).
All of these benefits assume one thing – that your business can afford to wait for capital!
There are lots of situations where waiting for capital just isn’t an option. You may be trying to open a restaurant, manufacture a product, or launch your new Internet company before another fast-paced competitor. In these cases, raising money is the only option.
Many companies also think capital is only for starting companies. But nothing gets an investor more excited than investing capital in order to grow an existing company. When your past experience implies a successful future, investors are more likely loosen the purse strings.
The best strategy is to go as far as you can, as long as you can, without raising capital. This will allow you to get a full handle on the business. You should only start making the rounds when you are at a point where not having capital is an absolute road block to your development, or you are forgoing far too much opportunity to avoid raising capital.