Shubham Saroj
Funding is one of those things that are a topic of debate and discussion. While it fascinates a lot of young entrepreneurs, it also confuses them at the same time. Since we want to give you some clarity, we would like to tell you about the pros and cons of raising funding.
We will talk about the 5 pros as well as 5 cons of funding. Yes, it’s true. Funding has its cons as well. But to keep things a bit positive, we will start with the pros.
The pros are as follows:-
1. Expand your business – The first advantage of funding is that you get to expand your business in ways that you planned.
Now you have the advantage as well as the resources of hiring more staff, invest into research & development, cover your marketing expenses and expand into new geographies. While your competitor might be stuck on the same pedestal, you can move quickly and aggressively.
This leads us to our next point.
2. First mover advantage – Building up on the first point, it allows you to capture the market before your competitors. This way you either grab a major portion of the market or you make them redundant.
First mover advantage might not always work in your favour but it certainly helps you if you’re into an industry that’s emerging as the next big thing.
3. Funding attracts more funding – When investors agree to fund you, it proves that your idea and business model is capable of delivering value to the customers.
Hence, you prove yourself worthy and in the future you can leverage your current investment to raise even more funding. Investors are willing to fund a business when there are already some investors present. This means that the business has potential and future growth.
4. Buyout your competitors – If you’re the largest fish in the market, then it allows you to use your power to eat other smaller fish. When you sense a threat from a much smaller competition, you can simply acquire them and eliminate your competition.
That’s exactly what Facebook did by acquiring Instagram for $1 billion and WhatsApp for $19 billion. They had the power and the resources to buyout their competition and that’s exactly what they did.
5. Resist recession – Every 10 years a major crisis happen. It happened in 2000 with the dot com bubble. It happened in 2008 with the financial crisis. It happened in 2020 with the pandemic.
It will happen again somewhere around 2030. When a recession comes, it wipes away many small businesses along with it. But since you have the resource to sustain a beating, you can resist recession until the business is booming once again.
If the 2020 pandemic forced many corporations to file for bankruptcy, if also forced millions of small businesses to shut down. It won’t be as easy as it sounds but you have a far better chance of survival as compared to a smaller business.
The cons are as follows:-
1. You dilute your equity – While raising funding looks and sounds cool, it has a major flaw. You dilute your stake and ownership in the business.
This means that the more money you raise, the more equity you dilute, giving away the power to the next majority shareholder. This takes us to our next point.
2. You give up control – Building up on the previous point, this means that there are more people that control or supervise the business and as a result, this means that you don’t have the same authority as before.
Now decisions have to be made with the authorization and consultation of the investors if something major has to changed or revamped. Not a very good thing if you like to run the business in your own way or want complete control of the business.
3. It doesn’t solve all the problems – A lot of people think that money will solve all the problems. While it’s true that it will solve major problems in your business, it won’t provide you with an exceptional work ethic if you’re lazy.
There are many businesses that were backed with millions of dollars by prominent investors but they failed to make their mark and were forced to file for bankruptcy.
Just to give you a perspective, even successful corporations can fail even after decades of economic progress and profitability. Just remember what happened to Nokia, BlackBerry and Kodak. They failed despite sitting on a cash reserve.
4. It’s quite difficult to secure funding – A lot of young entrepreneurs think that it’s very easy to raise funds. In reality it’s a lot harder than you think. Not every investor may like your idea and he/she may reject you.
You could be pitching to several investors before one says yes to you. It’s a full time job in itself and it might take 6-12 months before you get your hands on an investor’s money.
5. More funding – As soon as you go through the first round of funding, you must know that you would have to raise funding at regular intervals. This happens because if you decide to expand your business aggressively and quickly, you would run out of cash and would be need more money.
Moreover the current investors also want that you should raise more money so that the valuation of your company increases over time. Since your company isn’t a public company, the valuation won’t be increased until and unless you go through several more rounds of funding.
This might seem good but each time you take more funding, you dilute your equity as well as give up control in your business.
Funding Simplified
Funding has its own pros and cons just like any other thing in the world. It will all depend upon how you approach funding and what you do after you secure funding. Funding has its own sweet spot so don’t go after funding when you don’t need it. Try to build a business without external funding as far as possible.
Even when you secure funding, treat investor’s money as your money or even more carefully than your money. If you keep educating yourself and learn from your mistakes, then there’s nothing that you can’t conquer. We wish you all the best for your future and hope that the next trillion dollar company is yours.
Checkout 2 of our blogs on funding that explain 10 things to know before you raise funding and about the 7 ways that you can use to raise funding.
