The development of a company, especially when it is in its infancy, often requires a significant financial investment (for example the development of a new product) without short-term income. Even though this is a very attractive option and which is sometimes seen as a success, there are several disadvantages and constraints that should be kept in mind before starting this operation.
capital dilution
Fundraising is a necessity and may seem like an ideal solution for a start-up. However, it is easy to fall into the trap set by the latter. The most obvious of these is managerial risk induced by capital dilution.
Investors who have contributed capital and have certain expectations not only in terms of income but sometimes also in terms of business management. This can lead some companies to diverge significantly from their initial objectives and values, at the risk of losing their motivation and decision-making ability. Such development of the company often leads to dramatic results. Also, you need to keep in mind that if you raise your funds a little too early, you will have to wait for profitability, which may take time to come, and you run the risk of pressuring shareholder returns sooner rather than later. Let’s pick up
two examples of losing control
For example, Antoine Brenner and Benjamin Levy, the founders of Alinka and Gimglish, raised millions of francs in 2000, when they were already profitable. Despite the increase in activity and turnover, he went through a difficult phase on a human level due to the objectives imposed by the shareholders, which were in stark contrast to his professional practices. He resigned after two years and sued his parent company.
WeekendTour, a company specializing in the sale of weekend gift boxes, has had bitter experience with this. In 2011, after a sharp decline in its turnover, the company’s founder wanted to resell his company. However, the shareholders refuse to sell their bonds even at fair value, unless they bring the company into default and force its chairman to sell it for symbolic euros.
a significant time investment
Also pay attention to the time chosen for raising funds: this is a very time-consuming activity that requires full-time staff (often managers) for periods ranging from 6 months to 1 year. This may prevent you from devoting yourself full-time to growing the company when it needs your presence or more resources dedicated to fundraising.
right time to collect money
If you raise money too quickly, you run the risk of spending too much too quickly when your company isn’t ready and you won’t have time to find the best investments. Thus it can collapse very quickly as you can go in all directions and invest massively sometimes without any real use.
If you do it too late, you will already have started turning profitable and you will not be able to evaluate this investment to its maximum potential. The difficulty remains to define the exact moment when you need this income, even if you run the risk of finding only cautious investors or being too demanding on the terms … which hinder the growth of your company. Can be created when you wanted to turn it off. Never forget, investors are professionals who only want to make their contributions profitable no matter what the scenario.
The pitfalls of fundraising are numerous and can only be anticipated with careful preparation, organization and a clear vision of your business. This is an option that should only be considered as a last resort.