“Best startups don’t need funding” – a phrase we hear often. This is not untrue, however, in case a startup wants to create impact and grow, a funding round is the best way to speed up the process. Even if it’s not necessarily needed. FiBan study shows that funded startups grow faster and fail less frequently than startups not funded. When a startup has created a scalable business model – a business model where unit revenues exceed unit costs, external funding gives the possibility to skip the wait – skip the wait of accumulating profits before investing in growth. Hence, funding can save years of time for the IPO or exit the startup is aiming for.
Besides pushing the pedal, funding round can give your startup a remarkable amount of benefits.
Here we have divided these advantages into 5 areas:
Strategic Advice. When raising funding, it is important to pay attention to the source of the money. Raising funding is a great opportunity to seek strategic advice. Investors and their advisors are often familiar with the process of growing and managing a successful company. They may even have experience from very similar situations that your startup is phasing and will phase along the time. This experience may help your growth company to skip many pitfalls on your way. Smart startup founders will choose their investors based on the skillset they provide. Be it legal, sales, marketing or managerial help. Or something completely different.
Connections. Investors can be valuable when building connections with e.g. potential customers. Investors often have years of experience in their area of expertise and they have potentially created a valuable network. And as they are investing into your company, they have the incentive to introduce these connections to you as well. For example: how would it sound to get a warm introduction to your biggest customer’s Chairman of the Board?
Risk mitigation. As a founder you are putting your financial welfare under a huge risk. Only changing from a high paying job to low salary or no salary at all may feel risky. Putting your lifelong savings into product development is another story. Even though it is a good sign from an entrepreneur to put their “skin in the game” (invest personal wealth to a startup) – it’s not necessary to risk 100% of your personal wealth. With external funding you might even be able to pay yourself a salary.
Media visibility. How often have you read news about startups raising capital for growth? Raising capital is a perfect moment to start building those media relations. Once you have exceeded the news threshold, it’s a lot easier to do it again in the future.
Competition. Raising capital may ensure that your strategic partner will not invest into your worst competitor. Not raising capital may instead give your competitor the opportunity to raise funding and speed up their company development. Are you willing to take the risk of your competitor raising funding for a 10x marketing budget?
Even though we strongly believe that for maximum impact, funding round is a net positive decision, money won’t come free of charge. Funding round always creates stakeholder relations founders may have escaped when becoming an entrepreneur.
So, what are the 5 disadvantages of external funding?
Difference in ambition. Investors may want things to happen faster than you. VC’s are looking for 10-100x return multiple and if you are growing 50% per year that may just not be enough for them. Always before raising the funds, remember to discuss the expectations of the new stakeholders.
It takes time. Raising funding can save you years of time. Controversially, raising money can be a very long process. It can take up to 12months to raise funding and a big portion of this time is away from developing your business. If the process is moving forward slowly, it may also mean that your startup is not yet mature enough to raise money – in these situations it can be a good idea to keep on developing the company. Or even join an accelerator program, such as Kiuas or YC. There are plenty of sources for raising capital, and it might be overwhelming for the entrepreneur to decide where to start. To get a better understanding about the process, read through our guide for raising funding.
It may cost money. Raising money can be costly, and some operators may charge up to 10% fee from the round size – it’s a big amount of money away from investments in company development. On the other hand, paying a 10% fee might save you months of time.
Privacy. When raising money you will have to open up a lot of information about your business and yourself. Most of us have made some controversial decisions in business (e.g. buying a horse for the company or bringing previous company to bankruptcy). During a due diligence process you will have to explain these actions for the investors. Raising funding forces you to let go of a certain amount of privacy.
New stakeholders involved. You may have to report investors monthly on the current situation of your company and you may have to explain the decisions you think are obvious. It’s not only about you anymore, as there’s new stakeholders whose assets are in play.
Want to start raising money, but don’t know where to start? Have a look at our guide for raising funding in Finland. Want to move forward already? Here you can test if you would be a good fit for us to fund.