Self-financing vs Venture Capital – Founders use venture capital funding for scaling a company. Founders who don’t have experience scaling or need specific advice and contacts in a new industry to scale can benefit from venture capital funding. Also, if the startup requires multiple funding rounds in the millions of dollars for growth or is in an untapped growing market, venture capital can be a great source of funding.
Some of you do not realize, but we are proud to call itself a self-financed venture. Unlike others of our peers, this ensures that we have never drawn money out of investment capital firms or foreign partners. We admire what venture capitalists have to do, and without any hesitation, several world-class ideas and startups will not operate without their help today. However, this path often has benefits and drawbacks.
So Business Strategist Hirav Shah looks at the eight benefits of not becoming a risk-based business and how you can also create a productive and efficient company with Business Plan Consultancy, with a priority on building value for the clients and developing a lean startup team.
Table of Contents
Self-financing vs Venture Capital – Self-Financing is not so Risky
Self-financing is not that bad. This may now, of course, be discussed in both directions. We should both accept, though, that the field of business people and traders is relentless, hard-working, and intensely productive. On the other hand, few businesses are successful, and therefore every owner should carefully consider whether or not to use venture capital. Many of you already know Silicon Valley show from HBO, and even though it’s a sitcom, Neil Patel has written a great post on 10 Digital Marketers’ Lessons. Much of what they talk about is overcrowded, but some wisdom can be squeezed away from this series.
Self-financing vs Venture Capital – You can more easily say NO
We all know that with any business, there are good and bad customers. You’ve probably all had a good laugh with the Clients From Hell site at one point or another. And while this parody is meant to be a parody, it is closer to the real thing than many realize. There is always that customer who will take 90% of your time, while you will never hear from others. In such situations, it may be wise for your business to say no. And in some cases, in part. When you start, you can more easily select your clients and say no whenever it makes sense to help your team and your mission move forward.
Self-financing vs Venture Capital – Loyalty and priority for customers
When you self-finance a business, all of your income comes from your customers, so they instantly become your number one priority, not investors. This is a victory for both customers and the company. We always try to go above and beyond for our clients, and while there are things we don’t take care of, like development work, we’ll always try to help. Much of our growth over the years has come from word of mouth and customer referrals. We love our customers, we have built a great relationship with them, and we wouldn’t be here without them!
Self-financing forces fast, unconventional thinking
The shortage of resources to solve challenges pushes you to consider cost-effective and innovative approaches to such issues. We have to look outside the window. Self-funded companies don’t necessarily have a $15,000 budget to invest in Google AdWords per month. This pushes you to consider less traditional alternatives to specific issues. Over time, that would help you to address challenges and also focus on the sales cost (CPA) and the expected lifetime value of a consumer.
One goal: to earn money
When you self-finance a business, the main and only goal is to make money rather than spend it. Many venture-backed businesses are built or structured to grow their user base or the number of installations as quickly as humanly possible. Even if they are not paying customers, as they are just looking to be acquired or withdrawn quickly. There is certainly value in users, but if your plan fails, those users could be worthless overnight.
Keep more control
One of the most obvious benefits of not being a venture-backed company is, of course, that you have more control. Chances are, one of the reasons you start a business is primarily to have some autonomy. If you have a good idea and you can make it come true, why entrust some of it to outside investors who probably don’t like your product or service as much as you do? The sooner you sell stocks, the more it will cost you, as you will suddenly lose leverage for later, as well as dilution.
New employees are properly assessed.
It goes without saying that new contracts are really necessary if you’re a self-funded or risk capital-backed business. Nevertheless, a recruit is much more important to your survival as you have minimal funds. When you are granted $10 million by a venture capitalist, the first thing you would possibly do is to immediately hire the majority of the team and continue scaling up.
One of the benefits of self-support is that the whole cycle is streamlined simply by hiring more workers while the business expands and receives more. The employer will then quickly assess each employee and his or her abilities and ensure that they are in total alignment with business success.
Stronger if you survive
You will have a solid, lean, effective, customer-oriented, and forward-looking company if you survive self-financing. You know what works and what does not, where your advertisement, growth and service activities and app engagement platforms should be centered.
FAQs on Self-Financing vs Venture Capital: Why Self-Financing Wins
Why might self-financing be preferred over venture capital?
Answer: Self-financing allows you to retain full control and ownership of your business, avoiding equity dilution and potentially leading to higher returns.
What are the main benefits of self-financing compared to venture capital?
Answer: Self-financing offers complete ownership, full control over business decisions, and no need to share profits, unlike venture capital which involves equity dilution.
How does self-financing impact business ownership and control?
Answer: With self-financing, you maintain 100% ownership and control of your business, whereas venture capital requires giving up a portion of equity and control.
What are the financial implications of choosing self-financing over venture capital?
Answer: Self-financing avoids the cost of giving away equity, allowing you to keep all future profits. Venture capital requires sharing future profits and can dilute your ownership.
Can self-financing be more beneficial for long-term business growth?
Answer: Yes, self-financing can be more beneficial for long-term growth by allowing you to reinvest profits and make decisions that align with your vision without external pressures.
Self-financing and venture capital are two distinct methods of funding a business, each with its own advantages and drawbacks. To understand why self-financing might be considered better than venture capital, it’s helpful to compare the two in terms of control, cost, and potential returns.
Key Factors to Compare
- Ownership and Control
- Self-Financing: You retain full control and ownership of your business. You make all the decisions and keep all the profits.
- Venture Capital: Investors usually require a significant ownership stake and may have a say in business decisions. This can dilute your control over the company.
- Cost
- Self-Financing: The cost is mainly the opportunity cost of using your own resources (savings, personal loans). There’s no direct financial cost other than what you invest directly.
- Venture Capital: Typically involves giving away equity in the company. For example, if a venture capital firm takes a 30% stake in your business, they expect a return on their investment, which means the company’s growth and profits will need to be shared with them.
- Risk and Return
- Self-Financing: The financial risk is borne entirely by you, but you also reap all the rewards. There’s no external pressure from investors.
- Venture Capital: The risk is shared, but so are the rewards. Venture capitalists usually expect high returns (often 3-10 times their investment) and may push for aggressive growth strategies.
Hirav Shah’s Result-Oriented Calculation for Business Success
Let’s look at a simplified comparison to illustrate the financial impact of self-financing versus venture capital.
Assumptions:
- Business valuation before funding: $1,000,000
- Amount needed: $250,000
- Expected business valuation in 5 years: $5,000,000
- Venture Capital Terms: 30% equity for $250,000 investment
- Self-Financing: Use personal savings or a loan to fund the $250,000
1. Venture Capital Scenario:
- Initial Ownership: You retain 70% of the company.
- Value of Your Share in 5 Years: 70% of $5,000,000 = $3,500,000
- Value of Venture Capital Share in 5 Years: 30% of $5,000,000 = $1,500,000
2. Self-Financing Scenario:
- Initial Ownership: You retain 100% of the company.
- Value of Your Share in 5 Years: 100% of $5,000,000 = $5,000,000
Comparison:
- Net Gain with Venture Capital: Your share increases from $700,000 (70% of $1,000,000) to $3,500,000, while the venture capitalists’ share increases from $250,000 (30% of $1,000,000) to $1,500,000.
- Net Gain with Self-Financing: Your share increases from $1,000,000 to $5,000,000.
In this example, self-financing results in a higher total return. You avoid diluting your ownership and keep more of the business’s future value.
Final Words
Hirav Shah wraps it up by saying, “As you can see, when determining whether or not to pursue the risk capital path, a lot must be weighed. We’re honored to be a business-funded enterprise herein, and we know we’ve built a better squad. Our development is really fast, and from the beginning, we were productive. We are not resistant to venture capital funding, so we will seek to locate the right investors if necessary, but we firmly feel that self-financing is better for ourselves and our clients. Without Venture Capital funding, you can create a profitable company, so do not let anyone push you. Self-financing will take you longer to go, but it could be the greatest decision you have ever made.“
