Raising Capital - a Huge Mistake?

When Raising Capital Is a Fatal Mistake

Raising unneeded capital is often one of the biggest mistakes early stage founders make. This is because capital raising is an all-consuming mission which not only takes focus off the problems that inevitably pop up within your operation, but can actually make those problems arise more quickly and with greater intensity. Less than 1% of new businesses ever successfully raise venture capital, and the reality is that many of them are better off for having focused on the company first, and the capital later.

capital raising is an all-consuming mission which not only takes some of your focus off the problems that inevitably pop up within your operation, but can actually make those problems arise more quickly and with greater intensity.

Below we'll explore 3 major risks of a capital raise:

1. Far too many founders make raising capital their number one goal. The plan is to raise several million dollars, then figure out what to do with it. This is a huge mistake which often results in inefficient use of those funds and missed opportunities by founders who feel pressure to immediately put the money to work growing their company, but who don't have a plan for efficiently doing that. In addition, savvy investors know who has their things in order and who doesn't. Founders who focus on the business first and the capital only when necessary will have their pick of great investors, as well as having more leverage over the terms of their investment.
2. Another under-appreciated risk of outside capital is loss of control. Raising capital results in dilution of your ownership, and with dilution comes less decision-making power on your board. This is particularly true once professional investors become involved, as they tend to demand stronger board influence than the average angel or "friends and family" investor. Of course, having additional viewpoints from accomplished and intelligent board members can be a huge value add, but this should be weighed against your own control of the business.
3. Finally, the more people in your capital structure, the greater the amount of personalities and relationships that must be managed. Consider the exponentially expanding web of relationships you create when new people are added to your org. As an example, initially there may be only two people making decisions about your business - you and a co-founder. That is a single relationship. Add 5 investors to the capital table and there are now 11 relationships just between co-founders and outside investors, without even considering the relationships between investors. Each of these investors will have their own opinion on the best direction for your business, and each of these relationships have a chance of going sour.

All that said, invested capital is often one of the most vital inputs when building a successful company. If you're considering raising money to help expand your business, give us a call and let's explore all your options.