To Raise or Not to Raise, That Is the Question
Weighing the pros and cons of pursuing investors.
Editor’s Note: In the new podcast Masters of Scale, LinkedIn co-founder and Greylock partner Reid Hoffman explores his philosophy on how to scale a business -- and at Entrepreneur.com, entrepreneurs are responding with their own ideas and experiences on our hub.This week, we’re discussing Hoffman’s theory: You need to raise more money than you think you need -- and potentially a lot more. Listen to this week's episode here.
I have bootstrapped several companies and successfully sold them. I have raised money for companies, as well as turned down money for companies. I advise a couple of VC funds in Silicon Valley on investing and have even written a guide on how to get funding for your startup.
If you are able to develop your company without raising money, then you own the whole thing and can make all the decisions you want without being beholden to someone else. If you raise money, someone else owns part of your future company, which will impact your decision.
Here's why I chose not to raise money for some of my projects:
The projects just didn’t need it.
Yes, they took a bit longer, but I was able to fund them myself from my savings and consultancy work. I answered to no one and I kept the full value of the upside when I sold them.
Raising money takes time and effort.
Raising money is usually hard work and takes time and effort. Many startups spend too much time on early fundraising; if they focused on the company, they would have a more successful startup and might not even need to raise money. Think about the ROI of fundraising as opposed to working on your company.
Money comes with strings.
Do you want to have full control over your company? When you raise money, you make promises and investors have expectations. You have to answer to someone else for your decisions, which can be hard to live with in a startup that changes, sometimes a lot, over time.
What happens when you fail?
You have to believe your startup will succeed or why do it? What will you say to your investors when it doesn’t work? If your investors are friends and family, can they afford to lose the money?
However, there are also good reasons to raise money for your business:
Some projects are bigger than you.
Some projects need more money than you have and need a bigger team than you can assemble. If you have to hire developers who are going to take a long time to complete a big project, you may need to raise money.
Timing is important.
When a market is hot, you may want to capture as much of the market as possible; oftentimes, you can only do that with investment money. In many markets, it is a reality that you may end up with one or two dominant players. By getting there early, you end up winning.
Investors can add more than money.
Some investors can help you get deals with other portfolio companies or companies with which they have connections. The right investors can make a startup with their connections. If your clients will be Fortune 500 companies, having brand-name investors can help reassure them your small startup is worth considering.
Bigger can be better.
Having 20 percent of a billion-dollar company is better than having 100 percent of a $100,000 company -- if you only want money. Some people would prefer having a smaller company that they fully own and that meets their lifestyle.
In general, the further developed your startup, the stronger position you’re in to raise money, which means you will have to give up less equity. On the other hand, raising money usually takes longer than you think, so don’t start too late. Build relationships with potential investors, as they can give great advice even if you end up not needing them. If you do need investments, it’s better to know investors before asking them for money. Ask yourself this: Would you be more likely to invest in a founder with whom you’ve formed a relationship or a random stranger who sent you a pitch deck?