Today in our current startup culture, many of us have been led to believe that getting investors is the first thing you need to start a business. This is not true. The first thing should be solving a problem and getting your first sale. This means the market has validated your idea is applicable.
The first item in my head when I hear “you need investors,” I automatically think, “you want free capital for no product validation.” Maybe this is an assumption but its what I automatically hear. Think of it from the investor’s standpoint when you get asked to invest, “you want me to get investors with a zero revenue company with zero sales.” I understand that certain businesses with a massive problem to solve and runway would need capital, for example, extensive real estate renovation. 99% of most small businesses would not need money.
People also don’t say the disadvantages when you take the capital. Once an investor with money enters the fray, the stakeholder chain changes. Instead of your customer being top on the value chain, you now have an investor there as well. The investor wants a return. You will need to spend bandwidth with them when you could be spending it on your business. This is also applicable to adding debt to start a business. When you add debt, the bank eats into your cash flow and puts you in a bad spot from the start. As Mark Cuban said, 99% of businesses can be started without loans.
At the right phase of the business, it can be an advantage to get investors. Before getting investors, ask yourself, “can I grow with the constrained resources I have now.” Can you focus on your customers and sales, which profit growth will happen naturally? If it is advantageous to bring someone in, feel free to do so. Any wise investor will want to see sales and profits. Before going on Shark Tank, make sure you have sales and profits; otherwise, the Sharks will eat you alive.
“You should do everything possible not to raise funds. Sweat equity is the best equity. I would turn to crowdfunding [sites] like Kickstarter before I would look for investors.” – Mark Cuban
- Once an investor comes in, the stakeholder chain typically changes from customer first to investor
- Focus on sales, market validation and using sweat equity before taking capital from an investor or bank
- An investor will take up your bandwidth, which could be spent on the customer
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