When launching your startup, raising capital isn't always a good idea. Although it may seem less financially risky to fund a business with outside capital, you should avoid it as much as possible.
There are very good reasons why you should opt for self-financing. You risk losing control of your business, you’ll be accountable to investors and lenders, and it can also lead to legal disputes.
You risk losing control and freedom
Generally, fundraising involves exchanging a portion of the company for some form of contribution (not just cash—services can also be exchanged for equity). Depending on the quality of your vision and execution, outside investors may believe there is the potential for a significant return on their investment (and decide to invest in your company).
However, they can influence the decisions you make as your business evolves—and not always for the better. They will, in fact, have a certain degree of authority over your business or, at the very least, an influence on your day-to-day operations.
You need to make sure you’re making better decisions for the future of your business and what you can gain from it. If you don’t, you run the risk of losing control of your business. In the worst-case scenario, you could lead your business straight into a wall.
Raising funds is by no means a good idea if you want your business to grow in a healthy way. Even if it’s a strategic investment, the trade-off is often significant. Raise funds only if you truly need them.
Despite everything, you may be willing to take risks to launch your business. However, choose approaches that won’t have negative consequences for you and your team.
You're going to have to answer for this
Having shareholders necessarily means that you will be held accountable for many of the decisions and actions you take on behalf of your company (hiring, expenses, salary scales, strategic choices, etc.).
This is, in fact, considered a responsibility that you must fulfill, which makes sense since your financial partners are also taking a risk by joining the venture.
These new habits act as a mechanical barrier to your company’s growth. When you try to do things on your own, you’ll be asked to explain why—especially if you don’t achieve the desired results. This can be disruptive and have a significant impact on the survival of your business.
Bureaucracy will increase
When you're alone or with just a few people, it's easier to make decisions than when you have to consult with several people. This increases bureaucracy and reduces agility.
Imagine having to notify your“sponsors”every time you call a meeting to respond quickly to a situation. The fewer people there are, the easier it will be to complete your daily microtasks.
Fundraising affects your ability to control your growth
Fundraising is increasingly becoming a way to quickly raise your company’s profile. If it gains recognition in a short period of time, it means that marketing and advertising efforts have been made—and therefore significant sums of money have been spent.
If you’re not able to resolve any financial issues that may arise, don’t even try to raise funds. Learn how to generate revenue without having the funds to do so. Selling your products and services doesn’t require a full bank account (especially if it’s not your money).
There’s also the fact that you’re short on funds and have no choice but to seek more. Keep in mind that if this is the case, you’re in a tight spot, so you won’t have any leverage in negotiations (valuation, term sheet).
It’s better to take it slow but steady. With a little patience, you’ll gradually reach your goal. You’ll be taking a big risk if you try to raise funds for your business before you’ve (truly) proven yourself.
Fundraising can prevent you from making good decisions
An entrepreneur's decision-making ability is their greatest strength. It can be undermined by doubt or, more commonly, by external factors.
It’s important to understand that even if your vision is promising, you don’t share the same goals as your shareholders. A shareholder’s goal is to exit the company in 5 or 10 years by realizing a capital gain. While your decisions are aimed at building a sustainable business, your shareholders are looking to increase the value of their shares “quickly,” beyond just the tax benefits.
It’s a bit like being in a boat adrift in the middle of the ocean. If your fellow passengers don’t share your goal, your chances of survival drop dramatically. Think about this before you embark on a fundraising journey (whether you have a traditional business or a startup).
Fundraising Sparks Competition
One undeniable truth is that your company’s growth cannot please everyone around you. This will lead to many challenges. Raising funds will only add to them.
Other companies will become more competitive as they see you grow so quickly. Your strategies and the methods you’ve adopted will now be copied. Your local or national success could be jeopardized as a result. While it’s true that you’re widening the gap between yourself and potential competitors, you’re also drawing attention to yourself. Don’t assume this is insignificant or that it brings only positive results.
Legal issues may arise
At the idea stage, you have no (or very little) leverage in negotiations. However, the first investment round is where many important terms are agreed upon, forming the foundation for every future funding round. Even though a shareholder agreement is drafted anew for each round, it’s important to understand that the first one sets conditions that can become obstacles down the road (such as exit terms that are too favorable to investors, for example).
Setting poor terms from the outset could prevent you from securing additional professional funding in the long run, or even from attracting potential operational partners.
You may become dependent on this form of financing
Most often, you’ll encounter founders who have already secured funding and are looking to raise more money to launch a business or ship their products. The most important things they should be doing today become an excuse to keep putting things off.
That’s where the darkest side of fundraising lies. It wears you down—the easier it seems at first, the more it takes hold of you.
Fundraising is complicated
Having foreign investors in your company can make it more difficult to manage your business. There may be outside investors on the board of directors, and they are constantly scrutinizing the founder’s actions. There are often conflicting strategic and tactical goals.
Given all the problems that fundraising can cause, it would be wise to avoid it.
