I realise this article may be controversial, but I don’t care. I’m sick of thinking it, saying nothing and then seeing the consequences of my non-action over and over again. I’ve had enough. So here goes…
There seems to be an unhealthy obsession right now, particularly among young entrepreneurs, to “raise capital” to fund business growth. Proponents of this method typically site examples such as YouTube, Facebook and Instagram, followed by saying, “They did it and so can you”, almost as if these entities are an everyday occurrence.
For every YouTube, Facebook and Instagram, there are thousands of others that raise capital from investors and even family and friends only to have their businesses blow up in their faces.
Of course there’s a time and place to raise capital and I’m fully aware of all the reasons why you should. However, the majority of people I see considering this path are doing it prematurely, which is doing them more harm than good.
So instead of dreaming about the ways you can spend someone else’s money, my advice to you is to focus on how you can make your own. Having now put my opinion out there let me further my case by giving you six solid reasons why NOT to raise capital.
1. It Makes You Lazy
In my early days of business, I wished I had a rich father, so I could have started with an impressive office, a high-level brand strategy and a bunch of staff to make ‘it’ happen for me. Looking back I am so glad that I didn’t have a rich father, because I was forced to get creative and learn how to make money. As an example, when I wrote my first book many moons ago, I decided to self-publish, which meant I needed to cover an $18,000 printing bill. I hustled and pre-sold copies to corporates to cover my print costs. If that money had been given to me, I would never have built those muscles and gone on to fund 15 other books over the next three years. To summarise this point neatly:
If you can’t make money without money, you’ll never make money with money
2. It Distracts From Your Focus
A few years ago I watched someone go on a capital-raising quest. Somehow this person convinced himself that the only way to succeed was to have more money. For almost 12 months it totally consumed him. Every minute of every day he was talking to people, knocking on doors and writing proposals. In the end, he had raised $100,000 (for 33% equity). He threw a party to celebrate, as if that was a measurement of business success. I believe if he’d approached his marketing with the same passion, he would have made that amount of money in sales easily. Plus, he would have held onto his company and what he would have learned during that process would of been far more valuable than any money raised.
3. It Takes Away Your Freedom
I bet one of the reasons you went into business was so you could have more freedom. Being your own boss and doing what you want, when you want sounds great doesn’t it? For me, I love to travel and four times a year, I take a month off and go on an adventure with my wife and kids. Now, imagine if I had investors in my company. How do you think they would feel if I said, “Sorry guys but I’m taking four months off this year”? They’d be pissed – and rightly so – for two reasons. Firstly, they don’t want me taking any time off. And secondly, now they are going to be questioning every dollar I spend. Remember, I have their hard earned cash under my care. So they are totally in their right to say, “Stop spending my money and get back to work”.
4. It Slows Your Decision Making
Once an investor puts money into your business, they normally don’t just sit back and do nothing. With their money on the line they’re going to want to know what’s going on and feel part of the decision making process. Now, if they themselves are successful and seasoned entrepreneur’s, this will be a great thing. If they are not, their constant meddling will drive you crazy. You could try telling them they don’t have voting rights, but just see how well that one goes down. Also, don’t think that your days of writing proposals are over. You’ll now be writing them four times a year, because people will soon be asking for dividends and if you’re not paying them, people will want to know ‘when’ and see fresh forecasts. The result? More time spent on keeping people happy and less time on making money.
5. It Hurts Your Reputation
People that raise capital are the eternal optimists. But you have got to agree; statistically speaking, the odds of your business idea being successful are stacked against you, probably at a ratio of 10:1. So stop and ask yourself: “What if I take people’s money and my idea doesn’t work? How are they going to feel about me then?” The answer is – not great! How do I know this? Well some years ago (when I was much dumber than I am now) I invested in a friends business. He used lines like, “This is going to be bigger than Google” and “You need to get in now, or you’ll kick yourself later”. Sure enough, his business failed. So if you are going to raise capital, you need to be ok about possibly harming your reputation as a business owner and even worse, damaging your relationships with your family and friends.
6. It Becomes a Ball and Chain
OK, I agree this article is pretty negative. Lets say you defy the odds. Lets say you’re the one in ten that raises capital and then goes on to build a really successful business. Congratulations! But how are you going to feel if you’re still working like a maniac and you’re losing say 50% of your profit to people who are doing absolutely nothing? Are you still going to be motivated to get out of bed every morning? You might be big enough to say ‘well I would never have made it to this point without them’ and that is true. However if the company’s successful and you want to now increase your ownership, it’s not always easy to remove people. In fact I have one friend who was in this exact position and went on to mortgage his house to buy back his shares – at a premium price.
…if the company’s successful and you want to now increase your ownership, it’s not always easy to remove people.
What you decide to do from this point is up to you. My reason for sharing my opinion is simply to tip the scales back to level because they seem to have gotten way out of whack. To entrepreneurs out there (especially you younger ones) remember the goal of business isn’t to look successful, the goal of business is to be successful. And that means learning how to make money for the long term. If that means going a little slower or developing another business that will provide the cash flow to fund your pet project, then you should do it. Or better yet, get creative, because nine times out of ten, there’s another way to get what you want without raising capital. Then, when you go on to achieve the success you desire, you’ll still have the freedom to enjoy it.