The three main questions you should ask yourself before pitching investors
I’ve made many friends who run venture-backed businesses and it seems so luxurious. They raise millions of dollars, get their own office space, and hire fast to grow like crazy. But is that all necessary?
Do you really need to raise money for your venture?
Raising money from investors and venture capitalists is not as sexy as most people make it out to be. By taking money, you are losing ownership of your company and now have to report to a group of investors on where your company heads. While I’m not looking down on those who do decide to raise money, I simply want to challenge the belief that most young entrepreneurs have when building their business.
Less than 1% of all U.S. entrepreneurs have raised money from venture capitalists and there are plenty of success stories of entrepreneurs succeeding with complete ownership or their business.
Toronto-based entrepreneur Sol Orwell runs Examine.com, an online encyclopedia focused on health, nutrition, and supplements. Almost five years later, it attracts more than 40,000 visitors a day, generates seven figures a year, and it’s profitable.
“At the end of the day, I operate a business to help provide for my lifestyle. Taking external funding would have brought upon external forces that would have made it harder for me to enjoy my lifestyle.
I’m here to make a dent. I don’t need to dominate.”
Source: The Globe
AppSumo searches the web to find and promote cool tech products that they think would benefit employees at work. Noah Kagan, formerly employee number 30 at Facebook, grew AppSumo to an amazing start growing to 500,000 customers in just 18 months without raising any money.
Sridhar Vembu started Zoho, the 20-year-old enterprise software company, generating hundreds of millions in revenue without ever raising money. They now employ 2,500+ people and grow revenue 40% year-over-year.
“At the beginning, we were a bunch of guys with no experience so there was really no opportunity for us to raise capital,” says CEO Sridhar Vembu. “But we started to enjoy operating profitably. What started as a compulsion, became a commission. We’ve had the freedom to think and act and invest long term – with five to 10-year horizons, rather than quarterly. And unlike most people you read about in the Valley today, we’ve had to balance this vision with the financial discipline of having to pay for that freedom.”
There are so much more examples of successful bootstrapped companies. Our friends at 37signals (now Basecamp) compiled a list of companies who are doing more than $1 million in revenue and are profitable. You can still be successful bootstrapping your venture!
You should ask yourself these three main questions if you’re thinking about raising money:
1) Do you really need the money?
Is your goal to start the next billion dollar company like Facebook or Apple? Is your goal to make enough money to maintain a comfortable lifestyle? Is your goal to sell the business and retire before you’re 30?
I was sitting in a room full of entrepreneurs where each person had a chance to share their biggest goal and everyone chimed in to offer advice. This 30-year-old Chinese mom ran a successful software company and just reached $1 million in revenue in her first year. She revealed her goal was to generate $5 million the next year.
Everyone in the room gave her tactics and strategies to help.
“Hire a growth marketer to scale your business up.”
“Partner with social influencers to be spokespeople for your brand.”
“Develop your time and energy into creating more high-quality content so you’re seen as a thought leader!”
She had a few concerns about the advice and mentioned how work physically drained her, and how much she hated being away so much from her family.
This sparked an even bigger discussion when everyone chimed in to offer time management and productivity advice.
“Have a strict schedule between work and family.”
“Hire a babysitter to watch them while you’re in the office.”
“Use the Pomodoro technique to stay productive while you work.”
And when the mic finally came to me, I didn’t give her advice. I asked her a question, “Why do you even want to generate $5 million next year?”
“Well… I want to grow the business,” she stutters.
“Isn’t that what you’re supposed to do?”
The room was silent, puzzled why I even asked that question.
“What I hear you saying is that you want to spend more time with your family and less time at work. If the salary you’re making from the business is giving you a lifestyle you want, why work harder and longer for something you don’t even want?”
It doesn’t matter how hard you’re rowing your boat. If the boat is not steering in the right direction, your efforts are useless. Be clear on your goal and ask yourself, “Will raising money be the best way to get there?” If no, don’t do it.
2) Do you really need the money?
Do you absolutely need the money to grow your business? If no, continue to grow the business on your own. This will actually help you raise money in the future (if you decide to do so) because you’ll have more leverage to negotiate with company growth.
But in the meantime, brainstorm other ways to reach your goal without raising money. Don’t think of giving up ownership and raising investor money as being the only option to fund your business.
3) Are you willing to lose control?
Once you raise money, you now have to report to other people to keep them pleased. Your investors will want detailed updates on how you are doing and try to influence your decisions. Your board of directors will have a voice that may conflict with your opinions.
Will you be okay with dealing with the pressure to keep everyone content while still going strong on your own goals? Do you want that kind of lifestyle?
What are your thoughts on raising money or not? Let us know in the comment section below.
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