Raising money is one of the ways startups can find success. They get the necessary support to accelerate their growth in the market and can trounce the competition. The catch, however, is that funding often entails giving away a part of your company’s ownership to others.
Some startups raise the money for reasons that are unnecessary for growth. It is essential for you to evaluate your needs properly before raising money. Self-evaluation is sometimes the best thing to do if you want to avoid making foolish mistakes that will cost you a lot.
Here are some great questions to ask yourself before planning to raise money for your startup.
Question No 1: Why Are You Planning to Raise the Money?
It is essential for you to understand and answer this question first. Are you doing it for the prestige? Is there a real business need? Some people fundraise because they want to follow the trend and say, ” Everyone is doing it.” Some do it to get the expertise by having VC’s (venture capitalists) who have experience on their board. This is a good thing to consider, but it comes with significant risk as you are giving away a considerable portion of equity to them.
VC’s get almost 25% of the company which is a lot. Instead, you can choose to hire people who have the experience to be on your board, and by giving them a small share, you can still benefit from their experience. Don’t make the mistake of raising money for the wrong reasons as you might end up regretting. The best reasons why you need to plan on raising the money is because you have found a solution to a critical problem and you need enough money to execute it.
One more reason why you may consider this option is that you have a growing base of paying customers. Raising money in a situation like this is nothing but a matter of scale. It allows you to do things that you otherwise could not. You will be able to hire more employees or launch the product a little earlier.
Question No 2: Are You Confident That You Understand Your Audience Well?
At the core of every business is the critical element of providing a solution to a crucial problem. And this solution is not for everyone but a specific audience or customer base.
For example, Facebook wants to connect people who want to build their network and stay connected with people they love. In the same manner, Tesla creates high-end, sophisticated electric cars for affluent people who care about the environment.
If you lack a proper understanding of your audience or customer base, you will not be able to build a sustainable business, period. While you might make some sporadic money, you will soon suffer from the “feast and famine” model of entrepreneurship. Raising money is not going to change the needs of your target customers.
It does not matter if you have $0 or $ 500,000 in your bank account unless you can provide a solution to a problem that a group of people is suffering and are willing pay you for.
Question No 3: What Are You Planning to do With the Money that You Are Going to Raise?
Do you have plans to hire people, buy equipment and inventory or hire contractors that can build your website or mobile application? The moment you begin to hire people, you are increasing the stakes. There should be a way to bring in the extra revenue to pay for your salary and the salaries of others. Buying equipment like top-of-the-line cameras or building a video studio is going to be of no benefit if you or your employees do not know how to use them.
You should also take the time to think about ways you can maintain this equipment if you run out of the investment money. Having money is excellent as it can help you accomplish so many things within a short period. But what are you going to do once you finish spending the entire amount? It is sometimes wise to keep business simple and expand it over the years.
Question No 4: What Are Your Options?
Are you going to become bankrupt or do you have to find a day job if you do not raise the money? Or are you going to put in hard work and effort to find a better solution to the problem that people are encountering?
Sometimes, raising money can seem like an easier option than improving your core product. This is a mistake. You are not going to achieve anything if you have zero customers and a million dollars in the bank. Never raise money to avoid hard work which is the foundation that is required to build the business.
Question No 5: Are You Building the Business to Sell It?
This is one more thing that you may need to ask yourself. If you have no plans to sell your business soon, you need to avoid things that will take you to that path. Most of the investors are interested only when you plan to grow and sell the business so that they can make a return on their equity investment.
Sometimes raising money can be a great way to grow your startup and benefit from industry expertise. However, it is not without downsides, and you have to consider these before taking the leap.