One major challenge many startups usually face while trying to set up their business is funding.
Although there are different platforms offering seed funding and venture capital to startups, many entrepreneurs or founders are avoiding these investments because of the pressure that comes with them.
Before accepting an investment fund for your business you should ask yourself the following tell sign questions;
Can my business be venture-backed or not? Does the availability of capital suggest that the business needs it? Do I understand the concept of dilution of ownership?
Let’s explore the aforementioned questions one after the other
Can your business be backed by venture capital?
You can classify your business either as a venture capital business or a lifestyle business.
A business that can be backed by venture capital is usually one whose model has the potential of generating substantial returns while a lifestyle business is one that doesn’t have a scalable model but can be successful and highly profitable.
This may be due to market size or progress depending on team size rather than process automation.
Also read, Bootstrapping Vs Venture Capital Fund – Which to choose?
As an entrepreneur, it is important to identify these different types of businesses. Just because you have passion for a particular market or product doesn’t mean it is a business worthy of risky investment.
Market dynamics, opportunity to acquire customers and scale are factors to consider before jumping into a venture capital-based business.
However, if you have a passion for lifestyle business you should definitely follow through with it.
Do I need to take it because it’s there?
Before you jump at taking a grant or bringing on investors, you need to have an action plan for hiring, sales, payment and general procedure.
Not every grant is a good idea. It is not advisable to take on investors if you don’t have a plan on how to float and circulate the capital properly to get a scalable ROI.
Do I properly understand dilution?
When it comes to raising capital, many entrepreneurs blindly integrate outside investors into their board.
They underestimate the degree of dilution they will face when they do this. To hit the nail on the head, dilution is the percentage of ownership offered in exchange for capital.
Also read, Review: The Upside of Venture Investment Funds
Usually, investors are looking to enter the company with the lowest variable valuation so they make a very strong bid when negotiating which then results in a high level of dilution for the original founders of the business.
If you’re a founder, handing over a huge chunk of your company to an investor is risky business as it could lead to dilution so you should think twice before raising venture capital.
Understanding the different forms of business and knowing how to identify these tell signs would give founders an edge, hence, preventing them from making bad investments for their businesses.
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