Summary: There is no simple answer to this question.
The simple rule in business is that you must be willing to invest and take risks to grow, expand, and make money. While the rule might be simple, how you choose to execute against it is a personal choice and there are no right or wrong answers.
Sometimes I meet successful entrepreneurs who have built strong and sustainable businesses without taking on any debt or equity along the way. Their rule is simple: you invest as you can afford it. They’re not concerned about competitive pressures or getting bigger faster. It’s one way to go and an admirable path.
On the other extreme are those who choose to ride the venture capital treadmill. In these cases, years or even decades of losses can be acceptable as the company focuses on growth and market share. These entrepreneurs are constantly in fundraising mode. While this path is not for me personally, some of the greatest icons and success stories of our time have chosen this path.
I would argue that 98% of entrepreneurs don’t fall into either of the bookends that I describe above. At different points in their journey, they will rely on equity or debt to spur their growth.
In the early stages of these ventures, I find that entrepreneurs are often stuck on thinking that they need a lot more money than they do to get going. Instead of struggling to try and raise a million dollars to accomplish A, B, and C, they might be much better off raising enough money to get A done, and start to prove their concept and get some cash flow moving.
On the other side of the coin, often later in the life cycle of the company, when ideas and concepts have been proven, there can be a real need and benefit for expansion capital. Yet the entrepreneur either has the no debt badge of honor (they don’t want to take on any more debt), or they’re used to their routine and can’t think out of their box to reason how to expand and grow.
Where do you fit in this paradigm? One way to answer is to ask yourself the question, “If you were presented with a gift of $1,000,000 and had to invest in either your business or a mutual fund of your choice, how would you divide the gift and what return do you expect from each investment?”
We will talk more about the million-dollar question in future articles. For now, think about what you would do.
Until next time.