If anyone says raising funding for startups is easy to come by, you would definitely look them in the eye and think to yourself ‘how sarcastic’ they sound. The process of fundraising for any startup is quite rigorous and demanding.
Just when you have finally gotten all the funds required for your startup and getting ready to move the business to stardom, you must think to yourself, “oh! how lucky I must be to have come this far!” Yes, you have come that far, but never forget, despite the very many positive impacts of fundraising for a business, there definitely exist the negative sides.
Fundraising in all its glory still has negative sides for startups, which we would discuss in the following paragraphs.
Many times the rigorous unending efforts that go into finding a venture capitalist could actually be directed into developing a company’s growth and product viability in the market.
The time between finding a VC and then getting the needed funds is usually a long one and could be detrimental to the health of any startup.
This is owing to the fact that the said period is sometimes like a time of neglect to every other thing as founders are usually bent on getting what they want.
The more funds raised for a startup, the more part of the company dished out, meaning that ownership share in the company might come to a very minimal point.
This could mean losing out on several advantages of being a founder, such as losing a major stake, shared decision-making power and less company control. Diluting equity to issue new shares to investors can be bad for your business.
Funding can be relatively difficult and scarce to obtain because quite a number of entrepreneurs are on the lookout for a VC.
You might assume that your company is in dire need of funds to facilitate growth, but don’t be surprised to find quite a number of other founders also seeking funds for their companies.
Due to the number of founders on the search, it could take longer than expected to get the needed funds and this could mean putting things on hold, especially if the business has come to a point of exhaustion.
Many times, investors are only interested in funding a business based on the startup’s performance in the market. A business that is always dependent on investors for capital may find it difficult to access funds.
Being dependent on investors for capital at every point may necessarily require the most part of a company’s shares diluted and shared to several investors, this could actually be the death of the said business.
If investors, on finding out your market value, discovers there aren’t many benefits for their intended risk, they would rather walk away than invest their money. No one likes to plant on dead soil.
A founder of a business may think the company’s equity is inexpensive and would rather dilute equity to take out a loan, which could lead to a downward plunge into nothingness.
The truth remains unraveled about the worth of that business because the cost of equity is only known after it has been sold. The overall cost of financing can be expensive.
Investors expect a return on every of their investment and as shareholders in a company, if they come to a conclusion that a founder is not maximizing their values as shareholders, that founder could lose the company as they will be more than willing to let go of the founder.
If a founder is found to be underperforming or even misusing the company’s funds frivolously, that could just be the end of being addressed as the CEO (s)he so much likes to be called. Neglecting a business while taking the company’s funds for personal use is definitely not a virtue, it is a foe.
The flexibility of a company can be drastically reduced, with the founders’ control over the business limited if the company is dependent on investors.
Venture capitalist, for example, mandatorily requires an internal formal structure and board of directors elected in the company they invest in in order to enhance governance oversight and problem diagnosis.
As good as this may sound, it may not be too good for a founder’s decision-making power because there will be times when problems that require immediate attention and solutions will erupt.
Owing to the existence of the existing board of directors and internal formal structure, the founder’s hands will be tied, decision-making is no longer the sole power of the founder.
The bottom line is that there is a negative side to funding which could be detrimental to the growing health of a business. You may likely get access to funds that don’t require a monthly payback but at the cost of equity and a measure of control over your business.
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