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Old 26th May 2010, 03:33 PM   #1
zharlene
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Default Self-Funding Vs. Relying On Investors?

I know a few people who might be willing to listen to my business idea and invest in it in terms of start-up capital. I figure it might take me 2-3 years to come up with the money if I wanted to fund the business idea myself.

One of my friends who started a boutique told me that to be on the safe side, it's best to have at least one whole year of possible expenditures before I start a business because the first 2 years is more of a trial and error game for new business owners. So I've decided to consider her advice and that's how I've calculated my possible annual costs.

What are the disadvantages of relying on investors as opposed to self-funding, and vice versa?

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Old 26th May 2010, 08:55 PM   #2
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First of all it is not easy to find investors who will be willing to invest in a business that is just an idea. They are going to look for business that is already generating some revenue and has few customers lined up.

In terms of pros and cons of self-funding vs. investor you will lose freedom as soon as you give some equity to the investors. They will look for some control over how the business is being run to protect their investment. On the other hand self-funding will take time for business to ramp up.

my advice is to go with self-funding at least for some time and then go to investors after you have paying customers and revenue. As your friend correctly pointed out you will want to have some savings to fund your personal and business expenses at least for one year.

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Old 30th May 2010, 06:13 PM   #3
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Lots of good points AngelBiz. I might be able to find investors but I'm wary when it comes to splitting profits.

Potential investors that I know are successful business people and because we need them to start up, they know that they have the upper hand. I don't know how comfortable I am giving someone that much power in my business.

On the other hand, there are disadvantages with self-funding...namely the part where it might take too long and people tend to lose focus while they're still in the process of saving up for the start up.

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Old 30th May 2010, 07:40 PM   #4
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Quote:
Originally Posted by zharlene View Post
Lots of good points AngelBiz. I might be able to find investors but I'm wary when it comes to splitting profits.

Potential investors that I know are successful business people and because we need them to start up, they know that they have the upper hand. I don't know how comfortable I am giving someone that much power in my business.

On the other hand, there are disadvantages with self-funding...namely the part where it might take too long and people tend to lose focus while they're still in the process of saving up for the start up.
That's the compromise you will have to make. If your product and business is good and has great potential you may be able to leverage it to keep some power to yourself. The best way to do it is to give the investors minority stake and have a well-written partnership plan that spells out exactly what investors can and cannot do.

Whatever you do; hire a lawyer and get the partnership plan in a formal and legal way. Do not just go by handshake verbal promise.

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Old 4th June 2010, 01:52 PM   #5
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investors might want a large percentage of your business in return for the money they give you. Also they may have expectations on their return of investment that may not happen with your business.

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Old 4th June 2010, 02:14 PM   #6
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There is a rule in finance - near use your own money if you can avoid it.

The idea is to leverage other people's money and get a return for it.

Lot's of people get strung out about losing control or giving away parts of their business - but, for some - they can have 100% of nothing as they can't or it takes to long to rasie the money - 40% or 50% of a great business - the choice is yours.

Think about it this way. You open a business with someone else's money. You work at the business for a few years and get paid $50K a year and own a 20% stake in the business. Let's say that after five years, you sell your stake and move on - to this point (let's say you don't get paid the first two years) - you have received $150K in salary and say $100K for your stake in the business - all of which did not cost you a dime but your time (time that you would have wasted for less return working in someone else's business.

Plus, there is a time value to all things. Getting started now means being two year further along and two years of earning potential as opposed to waiting and raising the funding yourself.

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Old 6th June 2010, 02:33 PM   #7
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Lots of good points raised here. Thanks!

I do see your point phanio, I also agree with you on some level. I might know one or two people who will consider investing in my new business as a sort of "loan" where 100% of the company is mine and I just have to pay back whatever I loaned, plus the interest.

As for the years of saving, many people get sidetracked (I mean, almost EVERYONE wants to start their own business and actually plan to do so 'eventually'). So the advantage of finding an investor is that 'now' time when the hunger is very present.

It's definitely something I'll have to really think about, because if I do get an investor to loan me the money I have to guarantee the return.

I have been freelancing for several years now and I know enough to in this field but I still have a few things to learn about e.g. hiring people, quicker turnaround time, etc.

I suppose entrepreneurship is all about taking risks. There's only so much I can learn about marketing & business in general...I have a feeling I'll learn more doing it all first-hand.

Thanks guys.

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Old 13th April 2011, 11:32 AM   #8
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Self funding of course keeps your self in control and gives you the most profit. But if not having capital is keeping you from expanding, then you should look into raising capital.

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Old 13th April 2011, 11:24 PM   #9
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Why not find a partner whom you trust ?

I'd say start small and rent a tiny place OR use an online store.

Maybe you can take a look at this book:

The Art of the Start: The Time-Tested, Battle-Hardened Guide for Anyone Starting Anything [Hardcover] by Guy Kawasaki

It is on my list

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