I am frequently asked by founders my opinion on whether or not they should take on investment. I think it’s a little funny that folks ask me this knowing that I believe in self-funded businesses over raising money. I suppose many of these inquirers are asking because they want to hear the argument for not taking on investment.
My argument isn’t always an argument about not raising money; instead, it’s a question — Do you have a clear way to return an investment?Do you know that for every $1 you spend on hiring a new person, advertising, product development, etc…you can return $2 back through more revenue?
Or, are you just throwing things at the wall to see what sticks?If you KNOW you have a clear ROI for investing/re-investing any capital, then raising money is an option for you.
If you don’t know, then assume a 10 percent probability* of the investment producing a return on the investment dollars and ask yourself if the extra debt or less equity is worth it? *10 percent is the approximate percent of the time that new ideas produce a return for me. This is why I try to minimize spend while I test new ideas.
I’ve seen too many people throw away too much equity and other people’s money by not first vetting the potential ROI of what that money will be used for first.
Nail it, THEN scale it with capital.
Then the questions becomes, what kind of capital? Institutional capital comes with a payback obligation that may force you to raise multiple rounds of funding or eventually sell a great company that you love. Friendly capital will give you more flexibility and options as long as the dollar amount doesn’t get too big. In either case, make sure to do the back of the envelope math on whether the equity percentage you are trading capital for is a lot less than the boost in performance/value your company will experience as a result of what the extra capital buys.