When you’re looking to finance your startup’s growth in the most cost-effective way, you have to think about the true cost of capital that’s associated with each funding option. What is important to you? Staying in control? Protecting your personal assets? The cost of capital is only one factor. In this post, we look at the non-monetary risks associated with fundraising.
Time is money
Seeking out funding is time consuming. Focusing on it limits your ability to run your company.
When you’re evaluating various sources of capital, you should factor in the cost of your most valuable asset—time. How much time will you spend meeting with potential investors? How long will it take to fill out paperwork for a traditional bank loan or have your lawyer walk you through a term sheet?
In the early days, the CEO/Founder usually is the best sales person in the company. Not only they manage the day-to-day operations, but they are also “the face” of the company. When you are forced to focus a majority of your time fundraising, growth in top line can suffer, which can also hinder your fundraising effort.
Opportunity cost isn’t an unfamiliar concept to anybody who gave up a corporate job to start a company. During your fundraising journey, the longer it takes to obtain financing, the more opportunities will come and go. Maybe you’ll miss the chance to hire your next rock star, to work with a great vendor, or develop a new product feature. That’s why the speed of financing is critical in your fundraising strategy. Always ask yourself: when is my zero cash day? Start there and add 6-9 months buffer as a minimum to start your fundraising effort.
A traditional bank loan has the lowest cost of capital and therefore is the best deal financially—but it comes with a catch. If your company doesn’t have physical assets to secure the loan, which is the case for most tech startups, the only way to secure a bank loan is to make a personal guarantee. But then what happens when your business fails? Will you lose your house and other personal assets? Will you be okay with a personal bankruptcy on your record?
Be clear on how much personal risk you are willing to tolerate and include this element in your overall assessment.
Your professional reputation is on the line
Leveraging your professional network is a tried-and-true tactic for getting introductions to investors. But use your influence within your network sparingly. How often can you ask the same influential people in your network to open doors for you? Pursuing investors that aren’t a great fit for your startup may lead to introduction fatigue among your connections and eventually damage your professional reputation.
If you’re running a crowdfunding campaign, you’ll have to greatly expand your network and turn them into a crowd of supporters. So what happens when your campaign fails to reach the funding goal? Or when you do succeed with the campaign but fail to deliver afterwards? Be realistic in what you can accomplish so you won’t diminish your influence for the sake of a wild goose chase.
Your personal relationships are at stake
Many entrepreneurs start out by raising funds from family and friends. These early supporters aren’t investing in your company—they’re investing in you. They let you take their money to start this venture because they have close personal relationships with you, and believe you will succeed. But remember, they are also investors and they want to get a return on their investment. If you fail and can’t afford to pay them back, will it put strain on your personal relationships with them?
The emotional stress
Some people have natural higher tolerance for risk than others. But for all entrepreneurs, it requires an “all in” mentality at one point or another. Placing all your eggs in one basket can be incredibly stressful, and that’s exactly how you may feel if you spend months fundraising. Being clear on your chances of success and your tolerance for stress will help you decide which investment options are the best fit for your startup and a good match your fundraising personality.
Download our free Raising Capital for Tech Startup Guide for a comprehensive look at the most important components of a successful fundraising strategy, and learn how to land the funding deal you want.