Benefits of Not Raising a Ton of Money
I want to start this by saying I am not opposed to raising capital. That would just be foolish. You see that raising capital can build tremendous companies sometimes and they couldn’t be where they are without it. Facebook, Amazon, Tesla, the list can go on…
The reason I am writing this is because so often people don’t get to see the other side of things that should have just as much light shed on it. There are so many stories that you don’t see in the media because they might be deemed as boring, negative, and/or not get the most page views. About 25%-30% of venture-backed businesses fail. That is almost 1/3 companies! Let that sink in. I want to talk about those stories along with my experiences because I believe that it can help people that may have gone through the same struggles.
1. When you don’t raise money you keep more equity
This probably seems obvious for most people but for some reason people forget about this constantly. More equity for you means more control over your company, less people to answer to, and more money in your pocket! There are plenty of times when a company raises money it is because they are in a bad situation, not a good one. Let’s look at an example, take DoorDash. Tony Xu is the CEO of DoorDash. When someone thinks of DoorDash they think of a very successful company, lots of money, plenty of employees, etc… This is far from the truth no matter what anyone tells you or what the media projects. Before DoorDash went public Tony Xu owned 5% of the company at that time. Yes… 5%. All the funding they had previously was needed, but certainly not a good thing because each round the founders had to give more and more of their company away. Each round they had more and more people to answer to and less and less control. To help put it in perspective when Amazon went public Jeff Bezos owned 42% of Amazon. When Facebook went public Zuckerberg owned 28.2%. So next time you see a company raising money keep in mind that all that glitters is not gold.
2. When you don’t raise money it is much harder to fail
People don’t just give you money for free. They expect a return, and a large one at that (Usually 5x). The issue with this is it is too early to tell if your company is fit to be a huge company to provide that large return or not. When you raise a round, especially in the early stages, you are purposely putting yourself in the negative. You do have more money now to figure these things out quickly, but at the same time if you focused on building a sustainable profitable business you will have money, in due time, to do the same things. People raise money because they think this is the thing that is going to save them from failing when more often than not, according to the numbers, it is actually what causes them to fail.
Coming from a personal perspective I completely get it. People want to stay in the s*** for as little time as possible. It sucks when your friends, family, etc.. question what you’re doing, think you’re wasting your time, accuse you of being lazy, the list can go on. Those feelings are painful and even the strongest of people will struggle with that. When you get an investment it is like the light at the end of the tunnel. At least it feels like it for a very short period of time. People start believing in you, you get plenty of press coverage, it’s easier to higher employees, etc… You finally get that vindication that you were looking for so not only you, but also everyone else believes that what you are working on is actually real.
What is important to realize is that if you push through the s*** and figure it out the same things will happen! People start to talk about what you’re doing, friends and family notice you stop pestering them for money, and you feel true confidence when telling people what you do for work. Yes, this does take a bit longer to get to… but if you build something worth caring about you’ll get there. Once there, it is much harder to fail because you don’t have to pay any investors their money back, you’ve built something that is consistently making money and growing, and the only people you have to answer to is the team that you put together yourself.
3. Raising money won’t make you happier but having more freedom definitely will
When you raise money you are going to be unprofitable for a long period of time. This is not necessarily a bad thing because that is done purposely. Invest as much money into growing as possible, take some money to pay the founder’s salaries, and when the big bet pays off (Usually IPO or acquisition) that is when everyone gets rich! But what about all that time in between? What happens if you don’t make it to IPO or get acquired? During that time you are basically signing a contract (metaphorically) to put anything else you want in your life on hold for the next 5–7 years on average. The only money you will be making is the salary you agree upon with your investors (Which usually for a long time is very little).You are not able to invest your profits into other avenues because you have no money to invest since the company is not making any profits.
When you don’t raise money you can do whatever you want with the profits from your business! If you want to invest it back into your business to grow faster you can do that. If you want to go on vacation, you can do that. If you want to invest in real estate you can do that. Having the freedom to be able to do all these things and live your life the way you want is an amazing feeling. You don’t have to wait for the big payoff (That may not even happen), you can live a big payoff every year instead.
4. You don’t run the risk of hiring to quickly
Most times companies don’t fail because their best friend stole their amazing startup idea. They don’t fail because the giant competitor took all their customers. They fail because they run out of money and can’t pay their employees. If an investor gives you a bunch of money, with the goal of you to spend it… You’re going to spend it! Most of the time too fast! People think that the more employees you have the more proof that you have a real company, a company that is successful. False. Having more employees just means you pay more people. When you have an excess of money you often make unwise decisions and hire people that you don’t actually need. Basecamp has less than 100 employees and they make hundreds of millions of dollars a year. When you are hiring only using your profits it is much harder to have the means to hire too quickly. Here is a great philosophy to go by. Unless you have enough money saved up to pay that person’s salary for an entire year don’t hire them. When going through growing pains, don’t look at them as a problem. Look at it as an opportunity to make your team more efficient at solving problems and creating solutions.
These are the things I’ve learned from my perspective so far when bootstrapping a company. I was gung-ho on getting funding before but it just didn’t work out. I was able to look into both sides deeply and also talk to people who have raised money to help build my point of view. There are other benefits that I didn’t speak about here as to not keep this article too long. Our company is on pace to make well into the 6 figures this year so I will say I am pretty solidified in my personal positioning to not take outside capital. I may write another post about the benefits of raising money for those who might be interested in truly weighing both sides (Which I feel anyone meaning to start a company should). Feel free to email me (livebetterphl@gmail.com)
