The SME’s Guide to Raising Capital: P1 – To raise, or not to raise?
A version of the article appeared in Gulf News.
Part 1 – To raise, or not to raise?
Even the best entrepreneurs with the best ideas and the best business minds find it very difficult, if not impossible, to grow their businesses without relying on some form of external capital.
Over the coming weeks I’m going to take you on a fundraising journey – how to raise capital, where to get it, what to do when you get it and what to do once you’ve spent it. I hope you enjoy the column and find it useful.
I love building businesses. Remember the feeling you had that day when you realised that all the talking, researching, sounding out of a business idea has now actually turned into a business? I love that day. I’m addicted to that feeling. And I’m fortunate that on a daily basis I get to interact with entrepreneurs who’ve experienced that feeling and are ready to continue growing their businesses by raising funds on Eureeca.
When it comes to raising funds, there is no formula, no steps that guarantee success. Funding is an art not a science, and often the decision to invest in you or not comes down to circumstances well out of your control.
However, there are many tricks and tips, well beyond having the right excel spread sheet or “model”, that can make or break your funding campaign. And these are in your control. I’m going to let you in on the insights I’ve learned during my career, both through personal experience and from advice given to me by many of the big players in the funding game, both here in the Middle East and globally.
Here’s my first piece of advice: Think very hard when deciding whether or not you will raise capital.
Why? Because raising money is addictive. By that I mean that from the moment you get that first chunk of cash, your business is addicted to it. You will loosen your belts, hire more people, splurge on unnecessary luxuries, and the money will be spent. Then you will need more money just to fill the holes in your cash flow created by these new burdens on your costs.
The moment you finish your funding round, you will take a month breather and be back at it again, thinking and preparing for the next round. Point is, it’s a train that once you are on, it’s very hard to get off.
Take a step back and think…
Do you really need the money? Do you need it now? The easiest way to get investment is to show an investor you don’t need it. If you have proved your business model by bootstrapping, or rather making do without spending much, through paying people with “sweat equity” (free equity instead of cash), then you are a much safer investment.
Compared to 5-10 years ago, it really is so much cheaper and easier to set up and run a business, at least in terms of cost and access to cheap services. Internet is cheap and ubiquitous. CRM software, data storage (e.g. cloud), website building sites: all way cheaper than they used to be. Need office space while you get started? I bet there’s a co-working space nearby . Need some design work? Contract it out on freelancing site like Nabbesh.com.
The best processes and workflows in the companies I have set up came from when we had no money, when we had to be the leanest and most efficient machine possible. There’s a reason for this: creativity and resourcefulness. And these are key ingredients in any great company .
LESSON ONE: Money, especially early on, risks making you gluttonous and your business inefficient. Bootstrapping will help you build lean systems and workflows and teach you how to stretch the value of every dollar. This process will build the sturdy foundations for a great business and will prepare you to remain lean and resourceful once the money does start pouring in. Too much money too soon doesn’t give you this chance.
To learn more about who you should raise money from, check out Part 2 here.