Investors: A Question of Need versus Want
We believe that the answer to the question, “Does it make sense for my company to look for investors?” is a matter of need. In other words, it’s important to take an honest look at your company’s objectives and your options for reaching them to determine if you must acquire financing in order to do so.
The key word here is need not want. You might picture your company operating out of a high-end office building with 150 employees, each with a top-notch health-care plan and the latest computer on his or her desk. There is nothing wrong with envisioning that goal. However, if it’s possible for you to operate out of your one-bedroom apartment or your garage for the next year until you have some revenue rolling in, then you probably don’t need any of those things right now. We all want to have our vision realized sooner rather than later, but it can be a big mistake in many cases to bring in investors rather than patiently building your business at a slow, steady pace.
Common Reasons for Entrepreneurs to Seek Investors
There are many reasons why entrepreneurs feel a need to look for investors. Let’s look at some of the most common, as well as some questions you can ask to determine if you are dealing with a need or a want.
Enhanced Office Space
We see this one all the time. Many people think that having a proper office somehow legitimizes their business, so one of the first things they do is run out and sign a lease. But the truth is that unless you’re opening a dental practice or another business for which you must have a professional office, you can start almost any business without one. Some of the most successful companies around—Amazon and HostGator, for example—began in their founders’ garages or dorm rooms.
Even if you must meet with clients, remember that plenty of business is conducted at coffee shops every day, and it isn’t uncommon to meet at someone’s home office. If you’re thinking that you need an office because you plan on hiring employees—well, just keep reading.
Ask yourself the following questions to help determine whether you need office space:
How can my business be run from home?
What alternatives are there to office space?
If an office is necessary, would a co-working space be just as good?
Another expense that many entrepreneurs take on before it’s necessary is payroll. As with office space, this often goes back to the feeling that having employees makes your business a “real” company. We’ve devoted an entire section of this book to dispelling this misleading notion. For now, let’s say that employees are not necessary for most businesses for a long time, and many never have to hire anyone, ever. With all the options available for outsourcing, virtual assistants, crowdsourcing, and so on, there’s much that you can accomplish without paying for full-time help.
Questions to ask:
Can a virtual assistant or other outsourced solution do what I need?
Is there any real advantage to hiring employees at this time?
Are the perceived advantages to employees outweighed by the expense and headaches that come with putting people on the payroll?
Depending on your industry, you might need specific equipment to run your business. And no matter what your area of business, at a minimum, you’ll need a computer. But some entrepreneurs find that they have champagne tastes and a beer budget when it comes to buying these supplies. For example, let’s say that you’re starting a printing company and want to purchase a $150, 000 Heidelberg printing press. If you don’t have the money, you don’t have a business, right? Well—that might not be the case. The first thing you need to do in this situation is examine the alternatives. First, you can probably purchase a used press for a fraction of the cost of a new one. And although you might want a Heidelberg, compromising with another lower-priced manufacturer might work until you can afford to upgrade. For that matter, maybe you don’t really need a press at all. You might consider getting started by outsourcing or reselling, and build up a large enough client base to be able to afford to open your own shop.
Questions to ask:
What is the minimum with which I can get by for now?
Can I secure a short-term lease or buy secondhand?
By thinking outside the norm, is there a way to build this business without equipment?
Remember, this book is largely about vision. It’s vital to maintain that great vision of what you want your business to be, so we’re not telling you to give it up. We are saying that it makes sense to consider the various paths that can lead to that vision. And if one of those paths includes building your business without outside money, that’s a course you should follow for as long as possible.
There are some significant reasons that we feel it’s best to avoid this option for as long as you can—and in many cases, forever. Again, we don’t have anything against people who invest in companies. In fact, some of our good friends are VCs and angel investors. Most investors have their hearts in the right place and have a genuine desire to build successful companies. But even when you find an investor who is a good match, you have to be ready to give up some things that many entrepreneurs aren’t ready to relinquish. Depending on the deal you strike, you can expect to make concessions that range from handing over a piece of your company when it comes time to sell, to completely giving up control over everything you do and how you do it. Entrepreneurs are notoriously independent, and letting someone else tell you how to build and run your baby can be difficult, to say the least.
Excerpted with permission of the publisher John Wiley & Sons, Inc., wiley.com , from Small Business, BIG Vision: Lessons on How to Dominate Your Market from Self-Made Entrepreneurs Who Did it Right by Adam Toren and Matthew Toren © 2011 by Business Plus Media Group, LLC.