The Smart Way to Begin Your Business: “Outside Money is Plan Z”

By MNeanaey On Aug 2, 2012

One of the first questions you’ll probably ask: Where’s the seed money going to come from? Far too often, people think the answer is to raise money from outsiders. If you’re building something like a company or restaurant, then you may indeed need that outside cash. But a lot of companies don’t need expensive infrastructure, especially these days.

We’re in a service economy now. Service businesses (e.g., consultants, software companies, event planners, graphic designers, and hundreds of others) don’t require much to get going. If you’re running a business like that, avoid outside funding.

In fact, no matter what kind of business you’re starting, take on as little outside cash as you can. Spending other people’s money may sound great, but there’s a noose attached. Here’s why: You give up control! When you turn to outsiders for funding, you have to answer to them too. That’s fine at first, when everyone agrees. But what happens down the road? Are you starting your own business to take orders from someone else? Raise money and that’s what you’ll wind up doing. “Cashing out” begins to trump building a quality business. Investors want their money back and quickly (usually one to three years). Long term sustainability goes out the window when those involved only want to cash out as soon as they can.

Spending other people’s money is addictive. There’s nothing easier than spending another persons money. But then you run out and need to go back for more. And every time you go back, they take more of your company. It’s usually a bad deal.

When you’re just beginning, you have no leverage. That’s a terrible time to enter into any financial transaction. Customers move down the totem pole. You wind up building what investors want instead of what customers want. Raising money is incredibly distracting. Seeking funding is difficult and draining. It takes months of pitch meetings, legal maneuvering, contracts, etc. That’s an enormous distraction when you should really be focused on building something great.

It’s just not worth it. We hear over and over from business owners who have gone down this road and regret it. They usually give a variation on the investment hangover story: First, you get that quick investment buzz. But then you start having meetings with your investors and/or board of directors, and you’re like, “Oh man, what have I gotten myself into?” Now someone else is calling the shots.

We Said This: Before you stick your head in that noose, look for another way