Is External Funding Really Needed?
„Whenever you can avoid fundraising.“
Most of the time, it is preferable to start without external financing as it pushes you to keep your costs low and generate revenues quicker.
Entrepreneurs are often faced with this trade-off: Should I spend my time on product development and customer acquisition or should I spend my time raising external financing which helps me to accelerate product development and customer acquisition?
Please be aware that financing usually takes 6-12 months and can also fail. Even if it is successful, it does not mean you can accelerate product development and customer acquisition immediately.
To achieve this, you have to interview, hire, train and if necessary dismiss employees, implement structures and processes, manage investors, etc. As a result, first, you are busy with raising money, then you are busy with spending money, which keeps you away from product development and customer acquisition.
In short, it is often advisable to get as far as possible without external financing and to focus on product development and customer acquisition, i.e. on the actual performance of the company. Ultimately, the (paying) customer is always the best investor.
Signavio and Celonis, two of the most successful German software start-ups, have done precisely this and only brought in external investors after five years, but then with sums in the double-digit millions.
Timing is crucial for fundraising. A company always goes through ups and downs during its development. In particular during a crisis a company may need fresh money. However, this may not be what investors expect. They are looking for growing companies, meaning companies which are developing successfully. Therefore the timing is absolutely crucial for raising money – and most of the time it is advisable to raise money when you actually do not really need the money.