To launch your startup it is not always a good idea to raise capital. Although it may seem financially less risky to fund a business with outside capital, you should avoid it as much as possible.
There are very good reasons why you should prefer self-financing. You risk losing control of your business, you will be accountable to investors and landlords, but it can also lead to legal problems.
You risk losing control and freedom
Typically, fundraising is about exchanging part of the business for some form of contribution (not just cash, services can also be exchanged for shares). Depending on the quality of your vision and execution, external players may believe in a potential multiplier on their investment (and invest in you).
However, they can influence the decisions you make as your business evolves, and not always for the better. They will have some authority over your business or at least influence your day-to-day life.
You need to ensure that you make better decisions about the future of your business and what you can get out of it. If you don't do this, you run the risk of losing control of your business. In the worst case, you can drive your business into the ground.
Raising capital is not at all a good idea for the healthy development of your business. Even if it is a strategic contribution, the counterpart is often heavy. Only raise money if you really need it.
Even so, you may be prepared to take risks to get your business off the ground. However, choose methods that will not affect you and your staff.
You will be held accountable
Having shareholders necessarily implies that you should be accountable for many of the decisions or actions you will take for your business (hiring, expenses, salary scales, strategic choices...).
This is seen as a duty you have to perform, which is rather logical since your financial partners are also taking a risk by joining the venture.
These new habits are a mechanical brake on the development of your business. When you try to do things yourself, you will be called upon to explain why, especially if the result is not there. This can be disturbing and have a significant impact on the survival of your business.
Formalism will increase
When you are alone or with few people, you can make decisions more easily than when you have to consult several people. This increases formality and decreases agility.
Imagine having to inform your "sponsors" every time you start meeting sessions to react quickly to a situation. The fewer people you have, the less difficulty you will have in completing the micro-tasks of everyday life.
Raising funds impacts the control of your growth
Fundraising is increasingly becoming a way to make your business visible quickly. If it is recognised in a short time, it means that there has been marketing and publicity work, and therefore a lot of money spent.
If you are not able to solve any financial problems that may arise, do not try fundraising. Learn how to make money without having the means to do so. Selling your products and services does not require a full bank account (especially if it is not your money).
There is also the fact that you are short of funds and you are obliged to look for them. Bear in mind that if this is the case you are in a bind, so you will have no leverage in negotiations (valuation, term sheet).
It is better to go slowly but surely. With a little patience, you will reach your goal gradually. It is a big risk to raise money for your business before you have (really) proven yourself.
Fundraising can prevent you from making good decisions
An entrepreneur's decision-making capacity is his or her strength. It can be impaired by doubt, or more commonly by external factors.
It is important to understand that even if your vision is promising, you do not have the same objectives as your shareholders. A shareholder's goal is to exit your company in 5 or 10 years and make a profit. Whereas your decisions are aimed at building a sustainable business, your shareholders are looking for a better value for their shares "quickly", beyond the tax advantages.
It's a bit like being in a boat lost in the middle of the ocean. If your companions on board don't have the same goal as you, then your chances of survival decrease drastically. Think about this before you embark on the path of fundraising (whether you have a traditional business or a startup).
Fundraising creates competition
It is an absolute truth that the development of your business cannot make everyone around you happy. It will cause you to face many difficulties. Fundraising will increase them.
Companies will develop a competitive mindset to see you grow in a short time. Your strategies, your adopted methods will now be copied. Your local or national success may be compromised in this way. While it is true that you are driving a wedge between yourself and potential competitors, you are also drawing the spotlight on yourself. Don't think that this is harmless and that it only brings good things.
Legal problems can arise
At the idea stage, you have no (or very little) power over the negotiations. Yet the first investment round is where multiple important terms are agreed, forming the basis for each future round of funding. Even if a shareholder agreement is built again at each round, it is important to understand that the first one sets conditions that can become locks for the future (e.g. exit conditions that are too advantageous for investors).
Giving the wrong terms at the outset could prevent you from increasing professional funding in the long run, or even the arrival of potential operational partners.
You may become dependent on this method of financing
You most often meet funded founders who are looking to raise more money to start a business, or to ship their products. The most important things they should be doing today become the excuse to keep putting things off.
This is the darkest side of fundraising. It crushes you, the easier it seems at first, the more it takes hold of you.
Fundraising is complicated
Having outside investors in your business can make it more difficult to run your business. There may be outside investors on the board and they are constantly scrutinising what the founder is doing. There are usually competing strategic and tactical goals.
With all the problems that fundraising exposes you to, it would be wise to avoid using it.
