The Downside of Investors
Just because everyone talks about investors doesn’t mean you need them for your business. (You’re usually better off without them.) But sometimes there’s just no denying that certain situations call for a pile of cold, hard cash. That said…
Don’t assume you need investors.
Every week I get calls from entrepreneurs assuming they need to find investors. They’ve heard the buzz, read the articles and watched plenty of Shark Tank, so naturally they think that having investors is standard procedure. Well, it’s not.
In fact, most businesses start without equity financing* of any kind. Most who do get on the investor bandwagon realize they would have been better off without them (hence, my previous post on the downside of investors).
Yes, there ARE valid reasons.
I do believe in the value of investors. But only in those situations when they actually make sense. Here are three good reasons:
1. Special equipment is essential.
Let’s say your company manufactures shoes. And for one reason or another, outsourcing production is impractical. Let’s take it a step further and also assume that leasing space at an underutilized factory isn’t feasible either. Your only option is to buy the specialized equipment you need to produce your shoes. Whether we’re talking shoe manufacturing or another industry – yours may even be a highly specialized service – specialized tools, whether they’re molds, dies and something else, can be cost prohibitive. So you’ll need access to some serious cash.
2. You need a prototype.
If you’ve invented a new product or technology, you may need to develop a prototype to prove that it not only works, but that it’s the cat’s meow. And prototypes can get expensive, depending on what’s involved. Let’s imagine that to produce your ingenious widget, you need access to precision instruments or injection molding, as well as the professionals who can operate them. Depending on the specifics, the costs can add up very quickly. So you’ll need access to some serious cash.
HELPFUL HINT: Growth of the Maker Movement has led to budget-friendly makerspaces (such as TechShop) and fab labs (fabrication labs), and you can always try contacting your local university’s engineering department.
3. You can’t keep up with demand.
Some problems are definitely worth having. Starting a business that becomes a success – so successful that you can’t keep up with demand – definitely falls under the “Great Problems to Have” heading. But that doesn’t mean it’s not a huge challenge.
Let’s say you’re running a bakery where:
- You’re turning away orders
- The line is out the door
- You’re selling out of products as soon as they hit the shelves
- Your catering business is booked 9 months out and you want to accept bookings for larger events
You need help! More specifically, you’re dying to increase production. Can you say “ripple effect?” Increasing production means buying more ingredients, hiring more staff, adding display cases and increasing storage space. All of that costs money. So you’ll need access to some serious cash.
Explore other options first.
I’m going to go out on a limb and assume that, all things being equal, you’d prefer to keep control of your vision rather than sharing it with (or handing it over to) someone else. So be sure to explore all other options before deciding to take on investors.
If it turns out that you don’t have the personal funds to make it happen, and banks are asking for collateral you don’t have or a track record you don’t have yet, then investors may be just the ticket.
Forewarned is forearmed.
Just be aware that there are drawbacks, so be prepared. Raising outside funds takes: (i) a hefty amount of time, (ii) a ton of work and (iii) pulls your focus and resources away from your business.
And don’t forget: along with that check comes a new boss – counterintuitive for most entrepreneurs. That’s probably why bootstrapped startups are far more common than externally funded ones.
*selling a chunk of your company’s ownership
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