Financing increases your risk
From the translator: CTO and cofounder of the companies GrantTree and Woobius Daniel Tenner shares his thoughts on raising funds for start-up entrepreneurs. He argues that this greatly increases the risks, and I agree with him. In my opinion, start-up entrepreneurs need to go to business incubators and accelerators, but here in most cases they take projects with the expectation that they will immediately begin to attract additional venture capital investments after graduation. I think this is wrong. For example, I have a project that does not scale well and is not very attractive for an investor, but it already generates revenue. I am sure that I can earn and develop through my own turnover, why do I need an investment? Actually, the translation:
It's no secret that I like bootstrapping. It's nice to keep complete control over the business that I myself founded. There are some circumstances in which I would consider raising capital (as a springboard, not a pillow ) for proper business, but I think that they are possible in a fairly limited number of interesting (which are fun to manage) or almost interesting types of business and in completely insignificant part of the business, which may engage in newcomers.
Nevertheless, I consider both methods - bootstrapping and raising capital - acceptable when building a business. It all depends on your goals and circumstances. Without attracting capital, it would not have been possible to launch Google and achieve today's success. Facebook had to first get a share of the social networking space, and only then make a profit, so that funding is also needed here. Even Apple, the main cash bag, required funding to start its production (although today they probably would have used Kickstarter). Some types of business simply cannot exist without significant investment. Some work in a market where the winner gets everything, but to win you need funding. And some just do not have a clear business model from the start.
Sometimes I communicate with people about financing in the context of a business that should start making profits quite early or is already generating decent amounts of money, and they say they are looking for funding to reduce their own risk. This is a terrible delusion. Financing does not reduce your risks or the risks of your business - it increases them.
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For example, creating a business worth 20 million pounds is a pretty amazing achievement, but if you got 10 million from venture capitalists, you will simply be destroyed and left, as a founder, almost penniless, with twofold pre-emptive rights. In this scenario, the refusal of financing and the creation of a business worth ÂŁ 5 million would have brought the founder much more financial benefits.
Financial patrons may be a little more lenient, but even they tend to look for dividends, and using financing for the first time will gently push you into more and more loans. Such financing does not necessarily divide the result into two parts (patrons are more liberal if you decide to simply start your business and pay dividends), but still the great success of the first business may seem like a failure.
Remember that venture capitalists, despite all the joyful articles, do not do business to help you. They want to make money for themselves and their companions. Some adhere to more ethical and conscientious ways than others, and this deserves praise, but their basic business model is to get good returns on several super-investments and to limit losses to “failures” as much as possible.
Financing is useful when you are ready for additional risk in exchange for potentially greater profits. The concept of "lottery startups" is not so far from the truth. Investments are like gambling. When you use capital, you risk more, both on your own and on behalf of the company, in exchange for potentially greater profit.
If there was a way to increase profits without increasing risk, everyone would use it (in fact, there are many similar ways, for example, help from mentors, in-depth study of the topic, etc.).
From this point of view, it becomes obvious when it is worth using financing: you must take additional risk if you can afford it.
Most new founders are in cramped circumstances. Moreover, being newbies, they already take a big risk, because they don’t know how to run any business, let alone mega-successful, fast-growing technology start-ups. This is in comparison with those who in the past have been able to launch and make a profit from a couple of traditional enterprises, and now are looking for new ideas. This experienced entrepreneur can take on additional risk in order to obtain much greater benefits than from his past ventures.
Given these circumstances, I want to say that novice founders should try to reduce their risks, not increase them. It’s better for them to have a risk curve, which gives a 30% chance to earn more money than in previous work, with a rather smooth distribution of bad results and a low probability of zero return (to which, in my opinion, it’s easy) than such a curve, which gives a greater chance of zero profitability and a slightly increased probability of a very large profit.
In short, new founders almost never need to attract funding.
It's no secret that I like bootstrapping. It's nice to keep complete control over the business that I myself founded. There are some circumstances in which I would consider raising capital (as a springboard, not a pillow ) for proper business, but I think that they are possible in a fairly limited number of interesting (which are fun to manage) or almost interesting types of business and in completely insignificant part of the business, which may engage in newcomers.
Nevertheless, I consider both methods - bootstrapping and raising capital - acceptable when building a business. It all depends on your goals and circumstances. Without attracting capital, it would not have been possible to launch Google and achieve today's success. Facebook had to first get a share of the social networking space, and only then make a profit, so that funding is also needed here. Even Apple, the main cash bag, required funding to start its production (although today they probably would have used Kickstarter). Some types of business simply cannot exist without significant investment. Some work in a market where the winner gets everything, but to win you need funding. And some just do not have a clear business model from the start.
Sometimes I communicate with people about financing in the context of a business that should start making profits quite early or is already generating decent amounts of money, and they say they are looking for funding to reduce their own risk. This is a terrible delusion. Financing does not reduce your risks or the risks of your business - it increases them.
')
Risk structure
Attracting funding divides all your possible results into two parts. Initially, a business can turn around with anything from a complete failure (with zero or even a negative financial result) to deafening success, with all intermediate values. If you attract funding, it destroys a number of intermediate options. Venture capitalists, of course, want dividends, and if they are too small, a good success of an entrepreneur can turn into a relative failure.For example, creating a business worth 20 million pounds is a pretty amazing achievement, but if you got 10 million from venture capitalists, you will simply be destroyed and left, as a founder, almost penniless, with twofold pre-emptive rights. In this scenario, the refusal of financing and the creation of a business worth ÂŁ 5 million would have brought the founder much more financial benefits.
Financial patrons may be a little more lenient, but even they tend to look for dividends, and using financing for the first time will gently push you into more and more loans. Such financing does not necessarily divide the result into two parts (patrons are more liberal if you decide to simply start your business and pay dividends), but still the great success of the first business may seem like a failure.
Remember that venture capitalists, despite all the joyful articles, do not do business to help you. They want to make money for themselves and their companions. Some adhere to more ethical and conscientious ways than others, and this deserves praise, but their basic business model is to get good returns on several super-investments and to limit losses to “failures” as much as possible.
Easily…
If financing increases the risk so much, then why is it even needed?Financing is useful when you are ready for additional risk in exchange for potentially greater profits. The concept of "lottery startups" is not so far from the truth. Investments are like gambling. When you use capital, you risk more, both on your own and on behalf of the company, in exchange for potentially greater profit.
If there was a way to increase profits without increasing risk, everyone would use it (in fact, there are many similar ways, for example, help from mentors, in-depth study of the topic, etc.).
From this point of view, it becomes obvious when it is worth using financing: you must take additional risk if you can afford it.
Most new founders are in cramped circumstances. Moreover, being newbies, they already take a big risk, because they don’t know how to run any business, let alone mega-successful, fast-growing technology start-ups. This is in comparison with those who in the past have been able to launch and make a profit from a couple of traditional enterprises, and now are looking for new ideas. This experienced entrepreneur can take on additional risk in order to obtain much greater benefits than from his past ventures.
Given these circumstances, I want to say that novice founders should try to reduce their risks, not increase them. It’s better for them to have a risk curve, which gives a 30% chance to earn more money than in previous work, with a rather smooth distribution of bad results and a low probability of zero return (to which, in my opinion, it’s easy) than such a curve, which gives a greater chance of zero profitability and a slightly increased probability of a very large profit.
In short, new founders almost never need to attract funding.
Source: https://habr.com/ru/post/207816/
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