To raise money or not to raise money? That is the question. I find that a number of my startup clients want to bring on investors to jump start their business. It’s as if raising money is inevitable. With outside investment, however, comes added responsibility and organizational change. In this article, I am going to discuss four things to consider when raising money. I hope that reading these considerations will help you make the most informed investment decisions for your business.
Should You Raise Money?
The first thing to consider when raising money is whether you actually need money. In many cases, an entrepreneur can “bootstrap” their way to revenue . For example, a fitness trainer hoping to start an online workout business might host local classes to find their initial subscribers. If enough people enjoy the classes, then the trainer knows that they have an audience and could begin recording workouts for their website. By starting small, the trainer retains control of their idea and can quickly pivot to better serve their customers.
Is there a Market Opportunity?
All investors want a return on their investment, otherwise known as “ROI”. In order to maximize the ROI, you must demonstrate that there is a large market opportunity for your idea. If there is a small market opportunity, then the ROI is fairly limited. If the ROI is limited, then the investment is riskier. If the investment is riskier, then the investor might want more control over the company to protect their investment, or not invest at all. Conversely, if the market opportunity is large enough, the potential for return is larger giving the investor more confidence that you will grow their investment. Check out my article on establishing a market for your idea to learn more.
Seek Money AND Resources
It’s all about the Benjamins, right? Not necessarily. An investor is worth far more than their checkbook if they bring added resources to the business. These resources could include their business network, prior business experience to inform good decision making, and even potential customers. New business ventures have a high failure rate, so you need all the help you can get to succeed.
You may have the best idea and all the resources to pull it off, but there is still a chance that it won’t work out. In fact, about 90% of startups fail, 10% of which fail within the first year*. Therefore, it is important to be realistic when raising money. Your grandmother may believe in you more than anyone, but is it worth risking her life savings to launch your idea? Probably not. A seasoned investor, on the other hand, understands these risks and might have a higher tolerance for failure.
There you have it, four things to consider when raising money. Now go out there and raise capital! Or not.
*Startup Genome, “The Global Startup Ecosystem Report 2019” (Accessed March 27, 2021).