3 Times When Taking On Investors Actually Makes Sense
First, do not assume.
“Doesn’t every startup need investors?”
Without fail, a steady stream of entrepreneurs comes to me assuming they need to find investors in order to launch their new business. They’ve heard the buzz, read the articles and watched their share of Shark Tank; so naturally they think that finding investors is standard operating procedure. Well, it’s not.
In fact, most businesses start without equity financing* of any kind. Those entrepreneurs who do get on the investor bandwagon often come to realize they would have been better off waiting or avoiding it altogether (hence, my post on the downside of investors).
There ARE valid reasons to take on investors.
In situations when it really does make sense, I do believe in the value of investors. Here are three scenarios when bootstrapping likely won’t cut it:
1. You need special equipment essential to your business.
Let’s say your company manufactures shoes, and for one reason or another, outsourcing production is impractical. And you try leasing space at an underutilized factory, but come up empty. That leaves you with one option: to bite the bullet and purchase the equipment you need to produce your shoes.
Whether we’re talking shoe manufacturing or biomedical science, specialized tools and equipment – such as molds, dies, lab equipment or 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 greatest thing since sliced bread. And prototypes can get very 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, requiring signficant dollars.
HELPFUL HINT: The growth of the Maker Movement has led to budget-friendly makerspaces and fab labs (fabrication labs). Another option is to try contacting the engineering department at a local college or university. See? Creative problem-solving can save you a lot of cash and help you delay taking on investors.
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 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 as soon as product hit the shelves
- Your catering business is booked 9 months out, but you can’t book larger events due to cash flow limitations
You need help! You’re dying to increase production, but that means buying more ingredients, hiring more staff, adding display cases and increasing storage space. All of that costs money. So, again, you need access to some serious cash.
Explore other options first.
All things being equal, I assume you’d prefer to hold onto control of your business rather than sharing control or handing over the reins to someone else. So be sure to explore all other options before making the decision to take on investors.
Grab a trusted friend or advisor, channel your inner MacGyver and try brainstorming as many creative options as possible. You’d be amazed at some of the game-changing solutions clients and I come up with when we put our heads together.
Sometimes, though, there aren’t any viable alternatives. If you don’t have the personal funds needed and banks are asking you for collateral that doesn’t exist – or a track record you don’t yet have – then investors are probably the answer.
Go in with eyes wide open.
If taking on investors actually makes sense for your startup, be aware that there are drawbacks. Raising outside funds takes: (1) a significant – even disproportionate – amount of time, (2) a ton of work and (3) pulls your focus and resources away from your business. So be prepared.
And don’t forget: along with that check comes a new boss – counterintuitive, I know. That’s probably why bootstrapped startups are more common than companies funded by outside investors.
Even so, the right investors can make all the difference when it comes to bringing your vision to life with the benefits outweighing the drawbacks. Choose wisely and it might be the best decision you ever make.
*selling a chunk of your company’s ownership
Interested in one-on-one consulting? Click here.