By Daniel Marantika, BIDUK Business Development Manager
Personally, the topic of funding businesses fascinates me quite a lot. There is no shortage of materials that you can find online and in libraries about funding, about fundraising, and about corporate finance. It is its own discipline.
I’m not going to repeat all that. Instead I will mention 3 basic ideas that I think should form the framework or be the guiding principles when we look for funding for our businesses.
1. There is no such thing as a silver bullet.
There is no funding instrument that will make all your entrepreneurial problems go away.
Why? Because funding is just one of many decisions that the management team needs to make, such as marketing, operations, IT infrastructure, logistics and distribution, research and development, and human resources, among other things. You can be awash in funds and still make bad decisions in all these areas.
It is better to see funding as the ‘fuel’ to growth, and not the end goal itself.
2. Seek funding with the right structure, timing and purpose.
Now that we all see that there is no kind of funding that can act as a silver bullet for running a business, we can focus on the right funding. When I say the right funding, I mean it has to be the right structure, with the right timing, and for the right purpose.
The right structure can mean the right instrument, whether it’s an angel investment, equity investment, strategic investment, convertible note, capital expenditure loan, or working capital loan. It also means it has the right mixture of rights and responsibilities that you feel you can take on. For example, you need to answer these questions: Are you already in the position to be able to take on equity investment, or are you more comfortable with debt financing? Are you ready to invite a new partner that will be involved in the daily operations of your business, or do you prefer to keep the executive decisions to yourself?
When thinking about the right timing consider that funding takes time. Some instruments can take 1 or 2 weeks, other kinds of funding might take months. Let’s not forget that you’re not only spending time, but also effort here. Finding the right timing also requires answering this question: is it the right time for you to receive this specific form of funding (e.g. equity investment), or is it better for you to wait another year, when you have higher revenue which translates into better valuation?
The right purpose: Some types of funding are better suited for a specific purpose than others. For example, it’s not ideal to fund management salaries using a loan. In finance, there is a concept known as cost of capital. What it means is that every bit of money raised has cost and risk associated with it, whether it’s money raised as equity or as debt.
3. Don’t wait for the perfect situation.
The third idea sort of counterbalances the second idea and flips it on its head. Whereas with the second idea we are supposed to find what’s right, this time around I would say that we should not focus on finding the best or the perfect funding. Because, to repeat the first idea, a silver bullet does not exist.
Instead, this is where the business sense/instinct/gut feeling of entrepreneurs will be put to the test. We all can dream of the perfect situation for our businesses and our funding, but the reality will be far messier. Don’t wait for the perfect situation, move forward and adapt. Growth momentum in your business cannot wait.