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The dark side of raising capital too early.

Many entrepreneurs when starting their journey focus a lot on raising capital. They believe that money from investors will not only validate their business model but also help them in fueling the venture growth. Their attention is focused on the news of every other venture raising money or getting the seed money so they get fascinated by the publicity and attention their counterparts are getting. They believe that all the pain of the building a venture is gone and happy times are around the corner.

So, what is the risk associated with going all out on raising capital? This article will highlight the dark side of following this pursuit and making this pursuit the end.

Can you really handle the work coming your way?

Term sheets, equity dilution, Board, all such headaches aren’t a part of your focus and attention if you are just bootstrapping. By adding investors, these are the necessary evils and you need to know about them and better be able to handle them well.

Managing investors and managing their expectations aren’t easy tasks. During my second venture, where I raised money too early, I had this awakening. Instead of focusing 100% on to the business, I was spending a good part of my timing managing the expectations and reporting to investors. This resulted in the loss of focus and also the undue pressure of performance. Such pressures aren’t for everyone and usually, people end up burning themselves too early.

Lost Control

Most of the investors would come in and would want to steer the ship also. It’s a basic human need. With the angel and early seed investors, they will want to bring in cofounders and Board that will direct your course. In case the investors are experienced their handholding can add a lot of value. But if that’s not the case, then you are in trouble.

Also getting out of these mechanisms are hard. In case you feel that you have made a mistake and want to get out the arrangement, it usually is too late. Your contractual obligations might not allow doing so and you will be signing up for the money where it is being guarded of any such efforts.

Lost Focus

Raising money focus and making it the prime objective leads to loss of focus on operations. This makes early entrepreneurs not focus on building their business organically. They miss out on all the learning opportunities that even putting out a simple basic version of the app (MVP), would have given them. In case you to read more about MVP, follow the article here.

Time wasted in this pursuit could be utilized at getting the basic version of the app done, getting some feedback from reviews and comments, observing the organic growth and downloads.  So, beware, before you start the search. Make sure you have covered the basics and have a strong foundation for the business to build upon.

Oh, you might get fired.

The growth plans that you give at the time of raising capital might be too rosy. You might not have realized that development might take 24 months rather than 6. The CMO you wanted to bring will cost you 3 times more. Oh, the retention cost is too high. Remember, all these things come up and will come up. For early stage entrepreneurs, this might result in an underperformance and your lack of skills might not sit well with the investors. Remember they are there to protect and grow their money. If they see you are not the person they signed up for, they might have plans to kick you out of your venture.

The dream team is not there.

You also need to realize that building a successful business requires a good team. What if you are a good storyteller and can raise capital. But that doesn’t necessarily mean that you are a good CEO also or someone who can build a good team around your idea. Having a set of people with similar skills and working on getting the venture to scale is usually a disaster. Even if your group of 3 has been successful at getting the basic done, scaling to next stages will require a lot of complimentary skills.

There are many elements involved in growing the business. You can’t be someone who assumes that you can get it all done by yourself. You might not be in the position of motivating or convincing people to join for marketing, sales, business development or tech development. If the team is not there, then your business and the money of your investors are at risk?

SUMMING UP:

When is a good time to raise money, then? Its right time when your app is ready – at least MVP is up and running; you know that by hiring Mr. X and Y will add this much value to your business; you are seeing consistent growth in number of users OR even better revenues; you are 100% sure of the delivering on the business plan or promises.

Not everyone is a born good businessman. You need time to learn and grow. That process happening at your own pace and might be beneficial for you. At times admitting that you are a bit green for the job now, might save you and your venture.

app2dev.com

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