Raising Money to Start a Business - Pros and Cons

 

There is a common assumption that you have to raise money from outside sources to start a viable business. In fact, the vast majority of small businesses are launched solely on the owner's dime and time. Some businesses seem to simply require outside investment, particularly if they call for expensive equipment, a substantial inventory, significant labor, or the like. However, most business ideas can be modified into smaller startups without high capital needs and built up to the ultimate company over time.

There are advantages and disadvantages to raising outside capital for a startup, and the decision whether to launch a full business idea or modify it to fit your own budget might come down to some of these factors.

Advantages of Raising External Funding

Money
Obviously, the number on advantage of raising capital is that you have money to spend. All of your initial ideas can be implemented and, if your plan is well-researched, you will have no problem staying afloat during the early stages of operations.

Value-Adding Investors
Some investors include their own expertise in the investment deal. In these cases, they are essentially paying you to be your mentor.

Sharing Responsibility and Risk
Bringing on partners redistributes the risk, and potentially the responsibilities, from entirely on your shoulders to the agreed upon proportions among you and the investors.

Presumption of Competence
Customers, vendors, and other investors may perceive your business idea as more viable simply because you have already secured a significant investment.

More Aggressive Projections
Knowing that you are starting with a sufficient bankroll to fulfill all of your best-case plans can be the motivation you need to swing for the fences and shoot for an out-of-the-park homerun.

Disadvantages of raising external funding:

Loss of Control
Once you split your equity with an investor, you have no capacity to fire them outright. Depending on the deal you make, every decision may require discussion with the other guy. And, the more you accept as investment, the more power they are likely to want and wield.

Limited Exit Strategies
In the same vein as above, once you partner with an investor, it is no longer up to you when and how you get out of the business. You can't always just pass it on to your kids, or sell it to an interested entrepreneur, or even just close the doors.

Altered Focus
With plenty of cash in the bank pre-launch, your focus is more likely to be on spending money than making money...perhaps not the best culture for a burgeoning venture.

Overconfidence
Confidence in your idea and abilities is critical, unjustified overconfidence is just plain dangerous. Taking in an early influx of cash such that there is no struggle associated with your startup can develop a culture of squander and waste...a difficult attitude to overcome once the cash runs out.

Whether or not to seek out external funding, and how much to ask for, is a decision only the entrepreneur can make. Be sure to consider the long-term outcome of bringing on partners or taking out big loans. If you are comfortable with the downsides of external financing, you can get your idea to market that much faster. If not, it may take more time to get off the ground, but you will be in the pilot's seat for the duration. Whatever you do, stay focused on the ultimate goal and do not let cash issues detract from what you are trying to do.

-K. MacKillop, a serial entrepreneur, is founder of LaunchX and authors a small business startup blog. The LaunchX System is designed to help entrepreneurs [start a business] based on their own idea. It includes step-by-step business startup instructions, key software, business tools, and more -- a complete business kit. Visit LaunchX.com to learn more about this revolutionary way to become an entrepreneur.

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