The Downsides of Raising Money for Your Startup

by / ⠀Funding Startup Advice / May 13, 2012

Raising money should be seen as a means to accomplish ambitious goals for your company, not an accomplishment on its own. Securing investment from a prestigious venture capital firm can make headlines, but there are many downsides to raising money for an early-stage company. Here are a few:

1.) Dilution

The earlier stage your company is in, the higher risk it’s perceived to have. This means lower valuation and ultimately, lower returns for you. Startups should aim to validate their idea and get as much traction as possible before raising money. From the investor’s perspective, there is much more risk associated with a company with an unproven idea. A company with no traction is less likely to get funded and if it is funded, it will be valued lower than a company with traction. More dilution means lower returns for founders.

2.) Control

You can get fired from your own company! It’s fairly common for venture capitalists to remove the founder from the CEO position and hire a new one. In addition you will have less voting power on business decisions.

3.) Resourcefulness

Money can remove spending discipline. It’s nice to be able to take a salary after getting funded, but as Peter Theil believes, CEOs should be motivated by the long-term success of the company, not by the short-term benefits of a salary. Reid Hoffman took the minimum salary available while staying above the poverty line of $15,000 while serving as CEO of LinkedIn.

4.) Exit opportunities

If you decide you want to sell the company early at low price and move to the beach, you won’t be able to because of a term called a liquidation preference. This grants investors a minimum amount of the exit price before founders receive any.

5.) Time

Raising money is extremely time-consuming. It requires a lot of networking and meetings. For someone without much knowledge of how to raise money, it can also be very time consuming to prepare for fundraising. It’s time that could be better spent building the business or networking for partnership or distribution opportunities.

Technological advancement has made it cheaper and easier for a technology to launch and start getting traction and has thus raised investors’ expectations. I recommend startups use Lean Startup Methodology to validate their idea and get traction in a time and capital efficient manner. I agree with Niki Scevak: “Instead of raising money, writing code and then proving the business, do the complete reverse.”

Mike Fishbein helps startups through mid-size companies with capital raising, mergers and acquisitions and strategy. He also teaches a Skillshare class on capital raising and can be reached at twitter.com/mfishbein.

About The Author

Matt Wilson is Co-Founder of Under30Experiences, a travel company for young people ages 21-35. He is the original Co-founder of Under30CEO (Acquired 2016). Matt is the Host of the Live Different Podcast and has 50+ Five Star iTunes Ratings on Health, Fitness, Business and Travel. He brings a unique, uncensored approach to his interviews and writing. His work is published on Under30CEO.com, Forbes, Inc. Magazine, Huffington Post, Reuters, and many others. Matt hosts yoga and fitness retreats in his free time and buys all his food from an organic farm in the jungle of Costa Rica where he lives. He is a shareholder of the Green Bay Packers.

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