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Startup Financing

The Funding Conundrum: Why It's Better For Startups To Seek Investment Post Validation

The Funding Conundrum: Why It's Better For Startups To Seek Investment Post Validation
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You're reading Entrepreneur Middle East, an international franchise of Entrepreneur Media.

Running a startup is an uphill task that needs a holistic point of view. Entrepreneurs often need to juggle several things right from managing resources, partners and customers to making the business grow. Nonetheless, the good news is; once you have shown enough traction, you will get the attention of investors sooner than later. The big question is, when is a good time to sell your stake and raise capital? 

Most entrepreneurs want to grow fast and take the market by storm, but there are a couple of things inherently wrong with that idea. First, if your business has not shown proof of concept, you may run out of the initial capital sooner than you think. And secondly, exhausting your resources in hope of rapid (evasive) growth never lets you put a proper organizational structure in place. This often results in manpower and other resources not being utilized to their fullest.

This is where you will have to be on your toes. If you are a startup chasing fast growth, you would do well in putting up a structure first. Recruit good people, hand them their duties, and establish relationships both within and outside the organization before you approach investors for money. If you have got your basics right, you would be surprised as to how much you would save in the long run as a result of lesser capital dilution.   

In a study published by Stanford Graduate School of Business here, payroll data from over 600 businesses was analyzed and the results clearly stated that the average salary in these businesses was lower before early round funding compared to other stages of funding. In early funding rounds, funding itself was more important than the amount of funding because being funded in early rounds meant that the companies had the necessary capital to think and develop their products.

The study also shows that later stage startups had the capability to grow even before funding. This broadly shows that any funding in the initial rounds will be spent in developing the product or exploring the market. If entrepreneurs can sustain this round on their own and get their businesses to show a valid proof of concept, obviously their businesses will fetch them a much better valuation because most investors realize the value of experience.

In conclusion, if you are a startup trying to make your mark, you would do well if you raised the initial capital using your own resources. This however, does not apply to all the startups. There are some businesses that are capital intensive, like putting up a cement manufacturing plant, putting up a power plant or getting into retail.

But as long as your business is internet and technology based, there will always be scope for you to work smarter, come out with an engaging idea, formulate that into a product and show traction before looking to get funded. There are several startups out there that have done this. For example, Life Saver Essays, which helps students with their college essays, has made a product that connects students with writers, so they can communicate freely and exchange ideas allowing students to do better in their courses. This benefits both the students as well as freelance writers. Another great example is Whatsapp, which has only about 50 employees, but their product is so good that it quickly got popular with the masses. 

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