Can raising too much money harm your startup?
When starting a business, it might feel as though the only thing you truly need is investment. You could have the perfect idea, the drive, and commitment, but your budget just isn’t cutting it. When bootstrapping, it is very tempting to look at well-funded companies and believe that the only way to achieve success is to get backing from venture capitalists or angel investors. Although there are the obvious benefits of raising capital to fuel your growth, there is also a chance that it might harm your business.
While it might seem as though every startup you hear about has some sort of high-powered VC backing, this is an over-generalisation. Many successful companies have grown from next to nothing, without taking a penny from outside investment. In fact, the majority of startups are self-funded, from a mixture of savings, credit cards, friends, and family.
The biggest case against raising too much money in the early stages of your business is that you are likely to spend within the parameters of your (now) rather large budget, whether you need to or not. Having money to throw at your startup from day one has a far higher likelihood of ending up with a ‘quantity over quality' approach. Less money to start with will ensure that you focus on growing your business at a steady, considered rate and improving those aspects that cry for attention as and when they come up.
Jumping through hoops
Even if you think you will be able to spend sensibly, there is the question of your time being taken up. Coaxing investors into handing over cash takes energy out of the actual running of your business. If another viable way of gaining funds is through generating cash flow into your business directly from consumers, then why not focus that time and attention on them?
If you do secure backing from venture capitalists or private investors you can end up under a very large, demanding thumb. Those that put money into a business expect to see a return on it (otherwise why even bother?). Your autonomy is likely to decrease as your baby gets a new set of rules imposed on it regarding growth and profitability. Sure, this can lead to increased productivity, but when you chose to create a startup for the fantastic perk of being your own boss, having someone else still being able to call the shots can be a tough pill to swallow. This does raise the question of more money or sole ownership?
Essentially the more funding you get, the less hold over your own business you are going to have. If you went into the startup game purely to get rich and famous, willing to take risks in order to get there, then perhaps VC backing is for you. If you want a quality company that will grow with you, stay in your hands for a long time, and follow your values, then caution yourself against raising too much money, too fast.
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*Editor's note: This blog was originally published in 2016 and has since been updated.