Wondering if you should raise money for your business idea?
It can be a tough question to answer.
To help you answer it with confidence, I’ve put together this guide on everything you should consider. From when it’s a good time to raise money, to when you should stick to building a business without outside investment and why.
Table of Contents
Ask yourself why you want to raise money in the first place
Why do you want to raise money for your business idea in the first place? Is it because you don’t have any funds to begin with? Or do you really want to scale and grow to a multi-million or billion-dollar company?
It’s important you have the right answer to that question before you begin trying to raise money.
Without the why behind the pursuit to raise money, you will most likely fail because investors won’t have confidence that their money will be spent wisely.
So, let’s review some reasons why you’d want to raise money and assess if that is a good reason for both you and the potential investor.
“I need to raise money because I simply don’t have enough for a prototype”
If the business idea you are looking to pursue needs a prototype developed and you don’t have the funding to get that completed, you should consider if that idea is right for your lifestyle at this moment.
Maybe this idea would be better to launch after you’re running a company that is successful and making you money. Consider a side-business idea that can generate the start-up capital before you jump into the big ideas.
“I need to raise money because I need a massive marketing budget and to hire a bunch of people”
As a new or aspiring entrepreneur there is a common misconception that you need a massive marketing budget and a lot of employees to be successful. It’s easy to get caught up in the nightmare that your competitors will steal your idea and run you out of business if you don’t have those things. However, that is not usually the case.
Every business idea that launches starts small. Even Apple, currently one of the largest companies in the world, started in a garage and was only selling one model of their computer with only the founders running the business.
If this is the reason you want to raise money, you should consider starting small, and maybe even starting a side-business until it’s big enough to be a full-time venture.
“I need to raise money because my business idea is validated and already has pre-paying customers”
This is one of the few valid reasons why you should raise money and investors are much more likely to take you seriously if you already have validated the idea in the marketplace and have pre-paying customers.
Investors will have more confidence because if they invest in your business when the idea hasn’t been tested in the marketplace, there is a higher risk that customers don’t even want the solution you currently have developed. Leaving the investor at a loss.
That is why it’s important you’re raising money after you’ve validated a business idea, if you choose to raise money at all.
Other Reasons Why You May Want to Raise Money
You want to build a big company and sell it – and already have a team in place with a blueprint to make money
When you approach investors, it’s important that you have a plan for how you will make money and that there is a team in place to make it happen. If you approach investors with an idea and you’re the only one to execute, they will probably laugh you out of the room. You need to have a plan in place and be ready to go from zero to 100 once the investors give you money, that is what they are looking for.
Often times when you raise money, the investors, if they are venture capital investors, will want to exit (sell their equity position in the next three to eight years). This means that you will need to sell the company or buy them out at a price of three to five times their initial investment, which is an expected return in the venture capital world.
If you want to build a big company, scale quickly and look for an exit, then raising money may be for you.
Your invention that you’ve patented will change the world
If you have an invention that you know will change the world and the idea is validated by the experts in that field, then it may be time to patent that invention and raise some money. In these cases, it is much easier to get the attention of investors and a lot easier to move forward with chances of success. Think of the first smartphone. That was a device that was patented that changed our lives.
Other than those few mentioned reasons, I strongly encourage you to try and launch your business without raising money.
Why you should start a business without raising money
Starting and running a business without raising money can be very rewarding when you start making money as you get to decide what you do with the profits. Not only that, but you get to enjoy more freedom in your business and don’t have other investors nagging you with how to run the business. There are many other benefits we’ll go over too.
When you start your business without raising money, there are fewer distractions that you have to worry about. For instance, raising a sizeable amount of money, even up to $250,000, can take up to 6 months or even over a year, especially if you’ve never done it before. During this time, your schedule consists of reaching out to investors, travelling across your country or even internationally and pitching your business. There is still time to operate the business however, you still have to focus a lot of time on pitches and networking.
Less start-up costs
A con to raising money is the costs associated. As I mentioned above, there can be a lot of travelling involved which can easily increase expenses. Also, when you’re raising money, you will need to get lawyers involved to make sure the legal documents for any and all agreements are made properly. Lawyers are an extremely important aspect to include in your plan to raise money but they can cost a lot, easily adding up into $10,000 or more.
If you choose not to raise money, then you don’t have this major cost associated with running and starting your business idea.
If you choose to run your business without raising money, you don’t have to worry about the added responsibilities that come when you have investors. You may be thinking – what responsibilities?
If you choose to raise money and are successful, firstly you are responsible for generating a return on that person’s investment. They expect to make a lot more money than what they gave you and if you don’t fulfill that promise, it could destroy that relationship.
Secondly, since you need to generate a return on investment (ROI) for the investor, you may have to take on the responsibility of working longer hours. For instance, what is going to happen during the year-end when your sales team didn’t generate enough revenue? You may have to work the 70-hour work weeks to get those new clients and make your investors happy.
Sometimes to make those long-hours work you will need to quit your current job and scale back other commitments because you have more responsibility when it comes to operating your business. If you’ve wanted to keep your current job or want to keep your hobbies while running a company in the beginning, then you may want to consider not raising money.
Larger Equity Stake
Building a business for the equity component is a major reason why people become entrepreneurs. You probably want to create a better financial scenario and situation for yourself by creating an ownership portion in a business.
Well, when you take investment from people, they are going to expect that you give them a percentage of the company, and equity stake. After they take their cut from their first round of funding you raised, do you have enough to still be motivated and incentivized to build a company? What about if you need to raise more money? Will you have enough equity after your final round of funding to be motivated? Raising money can be a slippery slope as it’s easier to spend once you’ve got a bunch of funding. And it’s even easier to go out again and ask for more, but that will only dilute your equity position further.
If your equity position falls below 50%, you lose key decision-making power and you can also risk being fired as the CEO if the investors with the majority of the equity don’t like how you’re running the company. This was the reality for Steve Jobs in the ’90s when he first started Apple.
There are so many benefits to keeping your company’s equity and choosing to not raise money. You also get to enjoy more freedom in your business which can be a great feeling, especially since you may have worked hard to even get the idea you had in the first place.
Avoid the headache with loans
If someone is willing to give you a loan to start your business idea, you need to be very careful how the loan is set up. There have been cases where entrepreneurs get a loan and the business venture failed. And unfortunately, the loan was still owed to the bank instead of being part of the bankruptcy proceedings. Now that entrepreneur needs to worry about paying back that loan instead of trying to start their new venture.
It’s not all negative though. Debt and loans can be good after you already have a profitable business.
Think twice before you raise money from your family
Asking your family for money can be tempting however, if you are not successful with your first business idea, you can end up losing the money they gave you. In some instances, that could be money they could use for retirement, which would be gone in this instance. This is exactly why you need to try and avoid raising money from family and even friends.
You can be successful without raising money
There are so many examples of successful businesses that were able to make millions without investors in the beginning.
- Nasty Gal
- BestBuy (link to Quora)
- Tuft & Needle (link to Vox article)
These are just a few. There are millions of small businesses out there that are making over six figures a year and they didn’t raise money to get started. So why do you need to raise money? And how can you start a business without doing so?
How you can start a business without outside investment
Use other sources of capital
Have some savings that you could dip into? Using a bit of your own savings for the start-up costs associated with your side-business is a great approach to take. This avoids the need for outside investment and you remain 100% owner.
If you’re working part or full-time then using some of your paychecks towards your business idea can be another great way to find money to start a business without investors. Although it does take more diligence to find the money if you have a lot of bills to pay, it can really help.
Selling items you don’t use
Do you have used items laying around your home that you don’t use anymore? Sell them! You’d be surprised at the amount of stuff you have that you could sell and how much it would actually profit for you.
Start small in the beginning
When you choose to start a side-business without taking outside investment, you don’t have to worry about going all-in and quitting your job and scaling back your other commitments. When you start small and take the side hustle approach, you are able to keep 100% of your company, avoid burnout from investors hassling you about their money and build the business you dreamed of from the beginning.
How do you start small?
Start the business on the side
Well it all begins with your idea. You start by developing a business idea that fits your goals and lifestyle. By that I mean an idea that you can launch with the resources and funds you have available to you and there are a few resources I’ve developed specifically to help you:
Finding The Fit Ebook: The Practical Guide on How To Come Up With Side Business Ideas That Fit Your Goals and Lifestyle.
Access other business idea generation techniques and exercises.
Invest only when you have the resources
The next key to how you can launch and operate a business without raising money is investing in employees, new equipment, stock and other expenses only when you have the available profits to do so. For example, if you want to launch this business idea that costs about $500, but you don’t have the money, maybe you can sell some of your items you own that you never use anymore to get the money you need. Or maybe you can gather free furniture and other people’s belongings that they are giving away, refurbish the items and then resell them until you have enough money.
It’s about being resourceful.
The same example applies after you’ve launched the business.
I strongly encourage you to develop a business idea that you can launch without the need for outside investment. It will benefit you in so many ways in the future and will allow you to focus on running the business. If you need help developing that idea, make sure to subscribe below. You’ll get access to exclusive guides, strategies, tips and a sample of Finding the Fit to help you.