When you’ve got a great business idea, or frankly a business idea and lack of funding to execute it the natural thought is to fundraise.
Raising finance seems easier now that is was before, especially with the plethora of crowdsourcing solutions available.
But is raising finance the right thing to do for your business?
This fundraising can generally come from two sources, debt such as a loan or equity via issuing shares in your company.
Debt is always the cheapest option, because you are not giving away future income from the sale of your business. But more often than not entrepreneurs don’t like debt and look to raise equity.
The reason being is that it feels like you have a ‘proper’ business when you raise investment and have external shareholders.
All of a sudden, you’re the CEO of a mini ‘PLC’.
And to most entrepreneurs this gives them a warm fuzzy feeling of success.
But this success comes with a big caveat.
By accepting equity, you no longer own your company, well not all of it at least.
With this change in ownership comes responsibilities.
And it is this responsibility that causes most of the failures in UK business.
What am I talking about here?
Managing ‘other people’s money’ that’s what.
When you manage your own money, well YOUR business’ money you tend to be less speculative and more prudent. But when you have other people’s money, that’s a game changer.
Most MD’s or CEO’s then execute against their business plan, without real thought of whether that investment via the cash spend will yield the results required, ie increased sales.
All too often money is spent on things that are simply not needed.
It becomes a speculative investment but an uncalculated one. One that is justified and allowed because it was on the business plan that the investors bought into.
But if you were funding the business yourself and your didn’t need the equity from external investors, would you still execute against the same business plan?
The thing is, for most, that when you have a fist full of dollars, you become frivolous. It is not as painful to spend £50,000 on advertising when you have £1m in the bank, more so when that £1m isn’t your money.
But would you spend that £50,000 on advertising if you only had £60,000 in the bank and all of that money was yours?
You see, that’s the opium effect.
It’s like a drug in that you spend O.P.M – Other Peoples Money easier than you own.
So I question you if this is the case.
Would you do what you plan to do if you had to use your own money?
Or would you do something different?
When you raise finance you need to stop being a manager of your business and start to become the investor in your business.
Remove the needle from your arm and review your expenditure strategically.
Ask yourself, does spending this amount today take me closer towards my goal tomorrow?
Or are you now just addicted to spending more money because you can?