There comes a time in the lifecycle of every business when its founder, or team of founding partners, needs to decide how it will grow.
Startup culture has taught a lot of entrepreneurs that raising capital is the most desirable course of action. But just as every business has a unique selling point, every business decision needs to include the unique circumstances of the organisation.
Raising capital is simply not for everyone, and there are plenty of viable opportunities you might miss when chasing the most hyped option.
In my business, I spent about six months deliberating options with my co-owners, and we asked ourselves some key questions about the business that saw us waver between a few options.
1. Are you profitable?
Imagine you have a boat with a small hole. It’s leaking slowly, but you can keep afloat.
Now imagine that you have dropped a 200-kilogram weight in that small boat. Does the boat leak faster? Does it leak more?
That’s how I personally view capital-raising without properly considering profitability.
If you haven’t learnt the foundations of how to build a profitable business, the moment you add money, you just build a bigger unprofitable business. Your problems scale up at the same ratio as the business size and they are harder to resolve without throwing in more money to plug the gaps.
Make sure your boat is seaworthy before adding the weight of capital. With capital comes expectations and without being able to turn a profit you have no way of fulfilling those expectations.
I believe capital-raising is best for when you have the concept established and your business is profitable, but you’re stuck and cannot scale without extra money.
Don’t use capital to make a bigger boat unless you’re afloat.
2. How much do you value your freedom?
One of the top reasons founders start a business is for the freedom to do their own thing.
When raising capital, you should be aware that you will most likely need to compromise on that freedom to secure finance. There’s no such thing as funding with no strings attached. As soon as someone parts with money to go towards your business, they literally have a vested interest in how it will be used, so be mindful that you may have people constantly watching and judging your every move.
Many entrepreneurs are mostly fine with this, especially if they can negotiate with the funder on how the money is to be used.
The best-case scenario is if the funder likes what you’re doing and trusts you to continue using the capital to accelerate the business. In many cases, however, the funder is an investor looking for a significant return for their financial faith.
They often put time limits on when they’d like to see money flowing back their way and they may directly or indirectly interfere with the running of the business if they don’t think the founder is doing the right thing to grow it.
With money comes influence, so consider if dealing with the people who are going to give you capital is a road you wish to go down.
3. Do you really need capital?
It’s very exciting when you picture having an extra six or seven figures in your bank account. Especially if you were cash-strapped at the beginning, having more prompts you to start imagining all the things you could do for your business, particularly the big dreams you may have had that were put in the ‘too expensive’ bucket at the time.
Money, however, especially a lot of it in a short time, can be a double-edged sword if you don’t spend it wisely.
There’s a reason why a lot of lottery winners end up broke within a few years of winning the jackpot: they spend it unsustainably. When you raise capital, it can be tempting to do the same.
Instead, I strongly suggest writing down everything you may want to do in the next year or two. From this, determine what is a ‘must’. You may find you can already cover the essentials with the current growth of the business, perhaps with other models to deliver these funds.
4. Have you considered a franchise model?
Running through these questions made us realise that we didn’t need capital after all. We valued our freedom and we saw that because we were profitable, we could extend the business through developing a franchise model.
We recognise, however, that this isn’t the case for every business, and capital-raising may be the best way to move forward.
Raising capital is a viable option for many businesses, but only works if you are doing it for the right reasons. Be aware that obtaining funds is only part of the struggle; knowing how to invest it is the real issue.
Without these considerations, raising capital could be a one-way ticket to ruining your business.