When starting a business, one of the first few things that many fledgling entrepreneurs do is find a potential investor. An entrepreneur presents their idea, and if an investor likes it, funding will be granted in exchange for an ownership stake in the company. While this may sound like a straightforward and viable option there are a few aspects that should be considered.
Applying for an investment
While getting an investor to support your company is good, a major drawback of it can be the stakes that are being asked for in return. A 20% equity may not sound like a big deal (after all, you still keep 80% of your company), but when you think about your operation on a bigger scale it can make a big difference. A backer who owns 20% of your company means that for a revenue of £10,000, you’d need to give to the investor £2,000. On top of that equity, you’d need to pay for your employees, the costs of running the business, delivery, imports, etc. So is a 20% stake of your company worth it? This will depend on whether your backer can help you enter different markets, expand your business, and help with the direction of your company. Often it’s what the investor can offer apart from their money that matters more.
One of the reasons why entrepreneurs get pressured into acquiring investments from backers is because of certain economic factors that affect revenue. For example, when inflation is high, the general public tends to lessen their spending. The Consumer Price Index (CPI) shows how inflation affects consumer trends, and entrepreneurs use it to base their future decisions on. FXCM’s economic calendar shows that the current CPI is clearly showing volatility in consumer trends in Europe. A high reading anticipates a bullish attitude from consumers, while a low reading is seen as bad for business. When the reading is negative, entrepreneurs often panic and sometimes seek investments in order to help weather the slump.
We know that finding investment isn’t usually the most important thing in business. There are five key elements to the success of a start up, which are listed according to their importance:
2. Team (execution)
4. Business model
Bootstrapping, in the context of business, is starting a venture with little to no money. This means starting a business without the support of venture capital firms. In layman’s term, it means turning over money that was earned from customer sales and putting it back into the business.
Bootstrapping may be the most realistic option for startups. The idea may sound impossible to do but it’s not. What do Braintree, AnswerLab, TechSmith, Envato, Campaign Monitor, and Litmus have in common? All of them bootstrapped their way to success.
Successful bootstrapped companies go through two stages: first they seed money. This is the stage where entrepreneurs either break the piggy bank in order to fund the business or seek money from friends and family. Funding may also come from the entrepreneur’s full-time job until enough capital has been raised for the business.
The second stage is about getting money from potential customers. Think about Kickstarter and GoFundMe websites where entrepreneurs ask for backing from interested customers. Growth may be slow in the second stage because the business has to keep its operating expenses steady.
Every time you accumulate funds from customers, you can launch your products/services and expand. Successful entrepreneurs keep doing this until they become more successful through every launch and expansion.
Bootstrapping may be a long and hard road in finding the funds for a business. However, it certainly lessens the risks of burying yourself with debt. Finding an investor for your company, on the other hand, will instantly give you access to monetary resources but the stakes that you need to give up in return may hinder your business’ growth. Remember to weigh up these options before making any major decisions for your startup.