The startup world is a bit like a gold rush right now – there’s a lot of money to be made, there are almost no rules about who will make it or lose, and only a select few will see a sustained profit at the end of the day. Global venture funding hit a record in the first half of 2021, with $ 288 billion that is poured into early stage businesses. Such high numbers are probably leaving entrepreneurs around the world wondering what they should do to get a bigger slice of that pie.
Small business leaders who are salivating at the idea of getting a big cash injection from an angel investor need to slow things down a bit and focus on their own company first. The answer to the age-old question of whether your company should try earn money or raise money it is almost universally the latter. Generating strong income streams early on will make many of your fundraising problems much easier to handle later on.
4 reasons to focus on income before fundraising
1. More independence
No matter how good your idea is, how scalable it may be, or how interested investors are – a startup that’s already making money is in a completely different league than one with no income. That is not to say that there is something wrong with startups that cannot initially generate cash.
Some ideas require larger amounts of capital than others to be viable, but the early establishment of income streams completely changes the relationship between your company and your investors.
If you’re already making money, you’ve already shown that you have an established model for running a successful business.
Any investor who comes on board later will need to acknowledge that they are joining an already successful company, not trying to build one from scratch. On the other hand, if your business has yet to make money, your investors will want to have a bigger stake in the way you eventually will.
Every dollar you earn before allowing investors in is proof that your business is running and you don’t need an investor to come save you. This can help protect you against any overbearing “angels” later in the future.
2. More leverage
Along those same lines, the income also makes negotiations with investors much easier to navigate. If you run a business with no products currently in place, it can be difficult to negotiate with investors in good faith. How can any of you safely value a business that does not generate income? How can you turn down offers that seem too low, too controlling, or not heavy enough in cash?
The truth is, income is your ace up your sleeve when it comes to bargaining.
Not only does it increase your position among investors, but it also ensures that your business does not become obsessed with ideas that only become profitable on a large scale, giving even more control to your investors.
According to Devon Fanfair, co-founder of startup studio Devland“Building companies that demonstrate business value is the best path for new builders because they generate income with very little investment.
It allows operators to focus on solving quantifiable problems and build momentum that is fueled with each new iteration. Unfortunately, some startup builders get lost in solving consumer problems that are more difficult to validate without scale. This can work against growing confidence and routine behaviors that build traction. “
If you’re solid and consistent, even modest income can make a big difference during seed rounds.
3. More options
The logic here is pretty simple: There is a relatively small subset of investors interested in investing in startups founded on big ideas that have yet to implement them to make a profit, but almost all investors working today are willing to invest in companies that they already have a -proven ability to earn money in the wild. So the more options you have when it comes to interested investors, the better terms you can secure when negotiations finally rears its ugly head.
If you don’t believe me, listen to Geoff Ralston, president of the legendary startup incubator Y Combinator: “Investors need to persuade. Generally, a product that they can see, use or touch will not be enough. They will want to know that there is a fit between the product and the market and that the product is experiencing real growth.
Therefore, founders must raise money when they have discovered what the market opportunity is and who the customer is, and when they have delivered a product that is tailored to their needs and is being adopted at a surprisingly fast pace. “
An income stream of virtually any size proves all of the things listed above, and more.
4. Higher likelihood of long-term success
It’s no secret that the vast majority of startups fail within the first 5 years after they are founded, whether they have received funding or not. While this problem is often seen as only relevant to the world of startups, businesses of all kinds are in constant danger of failing if they can’t find a way to make money.
Investor funding can only prop up an unprofitable business for a while, but it can disguise some of the internal problems that startups often suffer from. Avoiding early investment in favor of income generation ensures that your company never has the opportunity to mask unsustainable losses with investors’ money.
Secure sources of income also mean that your business always has something to draw on.
If expansion plans and new products completely fail, you can always be sure that there is at least one way to keep your business viable in the future.
The world is so saturated with seed capital right now that it’s easy to lose sight of what running a business is all about. Focus too much on investors and they will never return the favor. Instead, show that you have a business plan capable of surviving and prospering, and you won’t have a hard time attracting the interest you want.
Image credit: dziana hasanbekava; pexels; Thank you!