The Negative Side Of Startup Funding

If anyone says raising funding for startups is easy to come by, you would definitely look them in the eye and think to yourself ‘how sarcastic’ they sound. Fundraising for any startup can be very difficult and challenging.

Just when you have finally gotten all the funds required for your startup and getting ready to move the business to stardom, you must think to yourself, “oh! how lucky I must be to have come this far!” Yes, you have come that far, but never forget, despite the very many positive impacts of fundraising for a business, there definitely exist the negative sides.

In all its glory, fundraising still has downsides for startups. We will discuss these in the next paragraphs.

Many times the rigorous unending efforts that go into finding a venture capitalist could actually be directed into developing a company’s growth and product viability in the market.

It can take a while before a VC is found and the funds are available. This could have a negative impact on the startup’s health.

This is because founders often want what they want, so the period can sometimes feel like a time of neglect.

A startup might have a lower ownership percentage if it raises more money.

This could lead to you losing many of the benefits that come with being a founder such as a larger stake, more decision-making power, and less control. It can be detrimental to your business to dilute equity in order to issue new shares.

It can be quite difficult and expensive to secure funding because many entrepreneurs are searching for a VC.

You might assume that your company is in dire need of funds to facilitate growth, but don’t be surprised to find quite a number of other founders also seeking funds for their companies.

The number of founders involved in the search could make it take longer to raise the funds. This could lead to things being put on hold, especially if there are no other options.

Many times, investors are only interested in funding a business based on the startup’s performance in the market. Investors may make it difficult for businesses to access capital.

Being dependent on investors for capital at every point may necessarily require the most part of a company’s shares diluted and shared with several investors, this could actually be the death of the said business.

If investors, on finding out your market value, discovers there aren’t many benefits for their intended risk, they would rather walk away than invest their money. Planting on soil that isn’t suitable for planting is not something anyone likes.

A founder of a business may think the company’s equity is inexpensive and would rather dilute equity to take out a loan, which could lead to a downward plunge into nothingness.

Because the equity cost is only known after the business has been sold, the truth about its value remains a mystery. The total cost of financing can be high.

Investors want a return on their investment. Shareholders in a company expect to see a return and if they feel that the founder isn’t maximizing their shareholder values, they could lose the company.

If a founder is found to be underperforming or even misusing the company’s funds frivolously, that could just be the end of being addressed as the CEO (s)he so much likes to be called. Neglecting a business while taking the company’s funds for personal use is definitely not a virtue, it is a foe.

The flexibility of a company can be drastically reduced, with the founders’ control over the business limited if the company is dependent on investors.

For example, a venture capitalist must have an internal structure and a board of directors in place in order to improve governance oversight and problem diagnosis.

As good as this may sound, it may not be too good for a founder’s decision-making power because there will be times when problems that require immediate attention and solutions will erupt.

Owing to the existence of the existing board of directors and internal formal structure, the founder’s hands will be tied and decision-making is no longer the sole power of the founder.

Funding can have a negative impact on a company’s growth. You may likely get access to funds that don’t require a monthly payback but at the cost of equity and a measure of control over your business.

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