Businesses are crucial for this world. You exchange what you have for something that you want. Trade is the basic brick that establishes the foundation of businesses. Which cements humans together with better cooperation abilities. As an entrepreneur goes about starting a business, he faces many problems. One of the problems is the issue of raising capital. If done correctly can change the future of enterprise for the better. Otherwise, it will sink the whole ship of sustenance.
Money capital is the lifeblood of every investment. Without this fuel, there can be no product, no property, no sales and no cash flows. This is an article talking about the same issue of raising capital. Read to know, should you even raise money? when you should not raise money and when to stop raising capital.
Things to Remember Before Raising Funds
If you don't know about raising capital, or If you don't know how you will end up managing money - don't raise funds. So, do your homework first. Deciding in advance, the goals and goalkeepers for the organisation is crucial. It will make the road to success otherwise it will be a recipe for disaster.
Remember, raising capital is for achieving scale. Scale means growth in this context. Raising money is essentially losing control and getting scale. You need to let go of total control in some cases of raising funds. So, If you are not ready to jump off a cliff with a firm belief in your team and culture. Don't seek a raise.
Another con is simple yet thoughtful. You don't need to raise. Yes, a raise is the least type of money that an entrepreneur wants. Even a Venture capitalist will tell you this. VC cheques are the worst kind of money. The favourable kind of money is your customers' money. Your own revenue. The best way is to go bootstrapped. Again, If you are risk-averse, stay put.
Disadvantages of Raising Funds
The first question that a rational person should ask is “Should he/she really raise money?” This question is a valid and important point to consider. Raising capital is not a fairy tale, it has its downfalls too.
If you are not ready to face the downfalls, smart advice will be that you stop chasing funds. These disadvantages can affect different people differently. Some might be more affected than others.
Let us see some of the responsibilities that you will have to carry if you are seeking capital.
When someone tries to raise capital, he is often left with the choice of diluting ownership of the company. Which means lessening the controlling power of entrepreneurs. It will allow interference of the Venture Capitalist in the decisions.
This interference can be effective or it can affect the growth of the company, depending on the scenario. If the entrepreneur is someone who wants full control of the company, reconsider the choice of raising funds for your startup.
An entrepreneur who raises capital has to be accountable. Depending on which source of raising he chooses, he needs to be accountable. The source or the Venture Capital can push and pinch for specific and exact usage of money.
A business person has to iterate his ways in different scenarios. He/she needs to be experimenting with a product. In order to get the perfect product-market fit. In some cases “being accountable for the capital raised” can also reduce the experiments of an entrepreneur. Leaving no space or very little space for mistakes.
This can be seen as a subsection of the previous issue. Raising capital is debt. Some people might get overwhelmed by the thought of using others' money. This heavy feeling of responsibility can disrupt the natural flow of an entrepreneur.
Which also points out someone’s personal relationship with money. A person having a bad relationship with money will fear its responsibility. That responsibility rises manifolds if the money is a debt.
When to Stop Raising Funds for your Startup?
If you are through the hurdle of deciding to raise capital. Let us discuss when to stop your fundraising rounds. It is imperative to mention that you need to take professional advice on this matter. Investors write a cheque when they are compelled by your work. When raising capital, remember the time frame. Check these points to get some bookmarks.
Ideal position -
So, when you've managed to impress an investor, make sure you know the ideal condition. The ideal condition is to raise as much as you want to reach profitability. The reason behind this is that it allows you to stop raising for more rounds. It will lessen the hassle one needs to go through for another round of funding. Remember to stop with an ideal cash position in mind.
Survival of Operations -
When raising capital, think about your burn rate. You need to consider how many months you are planning your operations to survive. It can be a year to 18 months. This definitive time frame set a bar for raising capital. Even though different products and startups have different burn rates, making sure your burn rate is in check is helpful.
The Growth Pace -
If your company is in a good cash flow situation. Like, when the company is adding more customers and revenues and employees. When it is growing really fast. Then you should refrain from raising large funds. The reason is that if you raise 2 to 4 years of funds at this growth pace, then by the end of 2 years you would earn a similar amount by your own operations. There is a good chance you reach that cash by operations.
So at that point, sitting on a huge debt is of no use. Checking your growth pace before taking financing decisions helps.
Cash needs -
It is always tempting to raise capital. To have surplus money than you actually may need. So it is important to remind yourself that there are harms too.
First, raising capital is expensive and complex. If an entrepreneur is not ready to handle this hassle, it can be disastrous. Second, due to unpreparedness, you may never know the ideal position of raising, which can make you raise too much. This can be a worst-case scenario. Third, remember raising deprives focus.
An entrepreneur’s main focus should be to provide value, anyhow. Raising money will get investors on board and this will take your arm and a leg. They might interfere with your vision too. So keeping these points in mind, you can set an ideal cash position for the company.
We get to know with this enlightening article that raising capital is complex. The best money way is still the bootstrapped way. It is considered the smoothest. But when it comes to hacking growth and scaling your product, a VC can do wonders. It can provide you with a primary boost or a launchpad for flying.
Nonetheless, that launchpad can also become the reason for your own perishment. Knowing how much you need, your burn rate of operations and the scale you want to achieve is crucial in setting a definitive goal for your fundraising. Having your vision and current situation intact in your head will go a long way in fixing this question.
It is strongly recommended that you go and take the path of organic growth. That is, growing your business naturally should be preferred. Before going on a run for chasing capital and Silicon Valley dreams. You might need the right advice, the right homework and just the right negotiations to get to an ideal position. This is not rocket science but it is nothing sort of less than that.
How long should a seed round last?
A typical range seed round lasts between 12 and 18 months.
How much traction is enough for investors?
The “traction” that's relevant for your current stage should be in the range of 0.1% to 0.5%.