When I ask entrepreneurs or startups, “What’s your biggest challenge?” the number one answer I hear is “I need funding.” Personally, I’m a huge fan of bootstrapping and having skin in the game. If you’ve got a lot to lose, you will be much more motivated to achieve results. In reality, getting Venture Capital or Angel Investment money is not the answer and doesn’t always guarantee success.
Let’s look at the three common sources people look for cash to grow their business.
Things to Consider Before Taking Money from Investors
- Colleagues or Silent Partners. People sometimes consider colleagues as a money source. And, once your company is successful, you will easily attract people who want a piece of the action. So it’s important to consider the potential pitfalls. For example, what percentage of the profit do you give for a $100,000 investment? Will it be 5, 10, or 20%? If you’re too generous upfront, you may regret your decision as the company becomes more profitable. If you’re not generous enough, they may ask you to turn the terms of the agreement in their favor. Also, decisions to raise prices, make pivots, or even close the business may become committee debates rather than focusing on the best action.
- Venture Capitalists. Accepting money from high-risk investors may come with a hefty price, such as giving up all or some of the control of your business. These investors are in the business to make money and in exchange, may demand that you only focus on short-term results. They may ask you to invest everything you have (including the savings account you started for your kid’s college) to show good faith. That family vacation to Fiji you’ve been dreaming of will vanish. At the same time, they scrutinize every expense or expect you to take a skeleton salary until you reach a certain level of profitability. To put it bluntly, they will own you. Think of them as the monster under your bed that will keep you awake at night. Ask yourself, is this the reason you went into business for yourself? Do you want someone else looking over your shoulder and questioning every decision you make? Only you can answer that.
- Friends and Family. Asking family and friends for money is less monster-scary-like, but not really. You may feel considerable pressure (voiced or unvoiced) to pay back the money before you are ready or able. Second, the money or traction gained may not be worth the headache (unless it comes from a rich relative with money to burn and not in any hurry to get paid back). What are the chances of that happening?
Bootstrap or Borrow?
To stay in control of your business, you may think the only option is to rely on a bank loan or personal line of credit. But then again, this requires substantial collateral as leverage. I’m not saying that using outside investors is not a good choice. I’m saying to be prudent in your decision and enter into an agreement with an ‘open kimono’ policy with the partners you take on and design the terms for your benefit, if possible.
I think using other people’s money is an effective tool for a long-term commitment, and the reward is postponed, but it is not a good way to gain resources at the seed or startup phase. Plus, any savvy investor will want to see signs of traction. If you’ve hit the two-year mark without anything to show for it (haven’t generated any real income), it’s time to make major decisions like beginning a major pivot or finding another line of work.
Not to say it can’t be done. The third year I was in business, I went to a bank for a line of credit and was refused. That didn’t hurt as much as the comment, “You should probably get a real job.” I did prove him wrong, shopped other banks, and eventually obtained funding. And it wasn’t easy. Years later, I ran across that banker again, and he redeemed himself by giving me an incredibly sweet deal and a massive line of credit. But I had earned it by bootstrapping and busting my ass over the long haul.
The moral of the story — pick your partners carefully and never burn bridges, as you may need to cross that bridge at a later time.
