Many entrepreneurs seem to believe that the primary objective of their business is to raise investment capital. This is the wrong mentality to have in any start-up, as your focus should be on building a sustainable business. I tell my students in our Entrepreneurial Financial Management class that my primary goal is to teach them how to start a business that needs as little outside money as possible through careful cash flow management, realistic forecasting, and bootstrapping.
Seth Godin (author of Bootstrappers Bible) strongly agrees in this post at Impact Lab from last Friday.
If you fund your company, even a little, you’ve just sold it. Maybe not today, or tomorrow, but one day. That’s http://laparkan.com/buy-sildenafil/ because rational investors are funding your company in the expectation that you are going to sell it and make them a profit. (sure there are exceptions, but not many). So, if you don’t expect that your company will be easy to sell for a big profit, or you don’t ever want to sell your company, it’s not a smart idea to raise money for it….[I]f you absolutely need a lot of money to do a particular business and the terms you’ll need to accept to get that money are unacceptable, find a new business. Nothing wrong with that. The market might be trying to tell you something.
Reading your comments takes me back to my days with a start-up software company. I have always felt that they had gone about funding the company the “wrong” way, but I was never sure how to put my finger on why it seemed wrong. They just did what many others had. After reading many posts, our textbook and class discussions, I am starting to see where the problem might have been.
The thing that management was most proud of was the fact that they raised millions of dollars to fund the company before they even had a product. At the time, no one was asking WHY they needed millions for a niche software. (Part of the answer was because they outsourced the development of the software rather than building a team that had any technical skills…the development ran about 2 years over schedule and at least quadruple the expected budget).
As a result of this strategy, the company ended up going public well before they were prepared, which caused all kinds of reporting nightmares and additional costs. Now acquisition has also become far less likely because of the regulatory and financial hurdles. Not to mention all of the initial investors who regularly stopped by to see how we were doing…some were friendlier than others.
If they had used some of the bootstrap techniques, they might not have had fancy offices with important sounding titles, but at least they would have owned a successful niche software company today, rather than a small percentage of stock and a handful of worthless stock options in a company that generally trades below $0.25.
Their obsession with starting big has given me an appreciation for starting small and growing as operating income allows.