Raising external funding has become something of a fashion among SMEs and startups today, and how much external finance one has raised is given as social proof of the soundness of the business concept. However, most SMEs and some startups may fail and wind up within a few years of their launch, and the most common reason assumed for their failure is a ‘cash crunch.’ It means they had the funds, but they ‘ran out of money.’ And most of them cannot accept that the actual reasons for the cash drying up were either their market selection was wrong or they did poor research or lacked expertise in the field they entered, or their marketing was ineffective. They didn’t fail due to a lack of money. Hence, an abundance of money or funds couldn’t have guaranteed them success.
External funds in any form, be it equity, business loans or debentures, or via crowdfunding or any other instrument, creates an overarching financial obligation that can lead to an SME or startup becoming overleveraged unless its finances are expertly managed. And there are also chances of losing management control or ownership because of how things are being handled. But with external finance and fundraising options now being more accessible, structured, and available, the majority of business owners find the temptation to launch or manage their business ventures with a full wallet tough to resist. Also, association with big venture capitalists or investors has its own advantages for a new brand, and those too are hard to pass by.
Focusing first on how to get the money rather than earn money shifts the resources of a business to creating pitch decks, proposals, and due diligence for potential investors, rather than staying on course and designing effective marketing strategies or building up the products, services, and customer base. As they say in entrepreneur circles, a “yes” from an investor may take six months, and a “no” may take a year. Meanwhile, new and inexperienced entrepreneurs are likely to go broke while finding or mobilizing funds instead of striving to make their business successful.
Furthermore, fundraising doesn’t happen in one go. There are the pre-seed round, the seed rounds, Series A, the Series B, C, D, and beyond. And through all these, the concerned SME or the startup may feel vulnerable at every stage and would have to lay bare its inside workings, strengths, weaknesses, dreams, plans, and resources in detail even before strangers. However, every business has diverse and unique needs, and in case you are thinking of equity funding, understand that it doesn’t need to be at the very beginning. In fact, your chances of raising funds improve drastically when your business enterprise has already become successful and has a vast and valued customer base. Raising too much money too early, even before establishing enough income streams to justify the liabilities, only increases the risks of failure.Of course, there are times when you might need to go for fundraising, but that’s when you are very much sure that you would otherwise run out of working capital or cash reserves in the foreseeable future, or you need the kind of support that investors bring. Having said that, here’s when you shouldn’t go for immediate fundraising: when you still need to find a solid customer base, when you still have resources to continue to fund your business and bootstrap, and when you cannot devote resources to pitch investors and simultaneously keep running your business. Also, if you need money that desperately, you should first explore options other than equity funding, as the latter would require you to dilute your control over your own company.