Why Raising Too Much Funds Might Harm Your Startup
If you have faith in the success of your business then it’s better to save for yourself less and pay more to your company.
In business, steady progress toward goals comes with proper management of funds. To raise a start-up idea to a successful venture, an entrepreneur plans a basic blueprint of resources he needs to stand his favored line of business. To initiate, he reaches to potential investors to raise good money after scanning in all sources available at low risk and stipendiary rate of return payable. Common investors & lending agencies in such situations look for opportunities to invest in new brain concepts and opt to get a returning benefit from them in the future.
Motivated by the financial support of investors, the entrepreneur in an unplanned way moves to invest the money raised in building assets of the company buying lavishing office space, furniture, hiring human resources and investing in other required business amenities. On making an unplanned expenditure, after some time the entrepreneur reverses back to the situation of insufficient funds and again moves to search for more investors with investing proposals. The cycle continues till he’s able to stand his business, resulting in high capital cost on the entrepreneur. So, for small businesses, especially for start-ups, raising too many funds without going in consultation with any business expert – the end always results in leaving no benefit of return.
If your start-up is at the building stage, then in the first few years you might not receive a desirable return of rate that you always wish to. So backing more pressure on your existing cost of capital in such situations might not result in keeping the performance of business well to the expected level.
To help you get alarmed with some negative effects of raising unplanned resources we highlighted this concept of ‘Why Raising Too Many Funds Might Harm Your Startup’.
Your Business Valuation May Suffer
As per basic norms, for raising a sufficient amount of capital a start-up has to dilute a large proportion of its own among the investors. To a normal give up ratio, the entrepreneur will be willing to give away 15 to 20 percent of holdings over to investors, but as a requirement of finance rises more stakes of ownership becomes investor-owned. This can harm the control of the entrepreneur on its creation and might take down the valuation of the company in the future. With a favorable response from investors, the start-up also receives high expectations to earn them huge turnovers.
Easy Funds Loses Creativity
To judge entrepreneurship with resources, it always favors when you grow with limited resources. Investment and expenditures made with resources raised outside kills ‘building business with low or no resource’ ability of entrepreneur. If start-up members think realistic ideas to grow limited resources, they are likely to develop better skills in business management in dismaying situations.
May Empty Your Balances In Initial Years
On receipt of funding from investors, an entrepreneur plans to spend a major part of it on infrastructure, hiring employees, outsourcing business services, legal expenses of incorporation and intellectual property, etc. If a limited amount is raised in the commencing year, all deposits shall go to business uplifting and uncountable business expenses. In such a situation, the unplanned duration of expenses will result in a severe cash crunch.
Raising Too Much Reduces Future Funding Possibilities
On the investor’s part, steady investment in business results in the lifting valuation of the company. This is a sign that in coming years of business, management of finance will become a priority of entrepreneurs. To ensure funds get appropriated for the future, the entrepreneur has to deal present invested money in such a way that potential and existing investors never leave hope with the company’s future valuations. So with initial funds raised, it is always recommended to go for only necessary investments and to save more for an unplanned future.
Have To Deal With Pressures Of Expectations
On raising too many funds just on the basis of an uncertain business idea, it will not be easy for the entrepreneur to guarantee success to investors. Investors in any situation expect tenfold return on their investment and to meet such expectations the owner has to also to match the turnovers of business also to ten-fold times in the coming years. This will create immense pressure on the venture.
More money will then become a resultant solution to every problem for the entrepreneur.
Fundraising is a crucial activity of the business, it should be done very wisely and taking care of investor interest. The choice of selection of a good source not only depends on the ease of generation but also on the ability of the owner to pay back. In work situations, the ultimate choice of cultivation and management of funds depends on the owner’s decision to rise.
On second thought, the entrepreneur has to ensure that a proportionate share of his business income timely goes to the investor and a part of it gets retained for future constraints. So, the second concern in priority while raising resources is taking care of investor interest.