There’s no question that a new business needs money to launch and grow. But while you have to have seed money, the best way to attain it is debatable.
So many entrepreneurs believe that raising capital is the best answer. I’m not one of them, and I generally advise my clients not to do it. (There are a few exceptions.)
The problem with that solution is that you spend so much time pitching and raising money that you don’t focus on growing your business — the business that is supposed to be acquiring clients, selling new products and services, and ultimately generating revenue.
Additionally, third-party capital obligates you to your investors, who might have a different idea about how to run and grow your business. You’ll lose control, get distracted and oftentimes be frustrated. That’s the last thing you want.
So, chuck that advice to the curb. Here’s what to do instead.
Alternatives to raising capital
In my opinion, raising capital — for most entrepreneurs — is a waste of time. I recommend to our clients that they fund their business through savings (as limited as it may be), easy credit, vendor financing and lots of sweat equity.
If you’re young and have no money to start out, you may need to take the “beg, borrow and steal” (not really steal, of course) route. You might have to get a loan from family or friends — or find a side hustle that can earn you some money to save.
If you’re older, have had a job for a while and are looking to transition into entrepreneurship, there may be more innovative ways to generate money. And there’s always good old-fashioned savings that results from tightening the purse strings and adhering to a budget.
Once you’ve bootstrapped your business, you need to execute on growing it. Focus on the target audience your business creates value for. Have strategic sales and marketing plans that move your potential clients through your sales funnel. Make your clients raving fans so they tell others — and expand your referral network and word of mouth.
This should help you generate sales revenue. At this stage of the business, revenue generally solves problems.
Tips for raising capital
If you decide to raise capital for your business:
- Don’t ignore your business. Raising money takes a lot of time. Establish an alternating rhythm of raising funds and executing on your business, raising funds and executing on your business. This is really hard to do, which is why most entrepreneurs who raise capital focus more on that than actually running their business.
- Consider the SBA. In addition to your own savings and the support of friends and family, another good option to consider is a loan from the U.S. Small Business Administration, via your local bank. Many times, the SBA is the perfect solution. It offers resources and support services to help you plan, launch, manage and grow your business.
- Have a plan. I can’t stress enough the importance of planning. It’s absolutely critical. Have a written business plan, a budget and a cash flow forecast. Refer to these plans regularly.
- Raise the “right” amount of money. So many businesses ask for too much money, or not enough. Really understand how much you need and how much your business is expected to grow. This requires a thorough and complete understanding of your budget and cash flow. Have a “use of funds” plan. The rate of business growth matters — don’t bite off more than you can chew.
- Watch how you spend it. If you’re going to raise money, have a really good schedule of how you will use the funds and when. I’ve seen entrepreneurs spend a lot of money on human infrastructure. Sometimes they hire more employees than they actually need or can afford, or they hire employees that require a higher salary than they can afford.
Bootstrapping your business without raising capital might take a little longer, but you’ll build sales, a steady customer base and strong reviews to prove your worth to future clients. And you’ll have more control over your business in the long run.
Randy Gerber is the founder and principal of Gerber LLC, which works with first-generation entrepreneurs. He works hand-in-hand with Gerber’s clients to understand what they want out of life, and then pust holistic wealth management plans in place designed to help make it happen.