Every startup goes through several stages in its journey to success. In doing so, startups have tomake important decisions in keeping the business alive and hopefully thrive. In this journey two of the most important words funders hear is ‘Revenue’ and ‘Funding’. At the beginning these words may sound to refer to the same thing, however these words are used at very different stages in the startup and mean completely different things. Most importantly, knowing the difference of fund raising and generating revenue can help startups not fall into most common pitfalls that will keep businesses from succeeding.
So which comes first? Fund Raising or Generating Revenue? Are they the same?
The answer to the question whether their the same is NO! Why?
This is mainly because of the purpose both of these that makes them completely different and most importantly considered in different stages.
When you begin to build your startup, be it a product or a service, there is a lot of time and money commitments to make. Most founders find themselves putting in their savings to create their MVP (Minimum Viable Product) that can be demonstrated to potential customers and investors. At this stage, the startup may not be making any money by selling their product or service.
However, in order to make the MVP, to take it to market, to display it at shows, to generate interest in potential customers until they find a paying customer, founders need to spend money. During this stage, if they are out of money or need to collect or borrow money, they go in to a stage called ‘Fund Raising’.
This means that the business is raising funds to do a particular thing to improve its business, be it for development, research, reaching potential market etc. Whatever activity the business needs to do to find customers and generate revenue, at this stage they must engage in and the cost of it can be covered from raising funds.
There are many ways and stages for a business to raise funds, which we have covered in our previous blog post ‘A detailed overview on funding stages’.
Once the business has used these funds to gain paying customers, then the business will start generating revenue.
When a business has started to make revenue, should the fund-raising STOP?
The answer is a YES and a NO.
The purpose of raising funds initially is to help lift off the business. Once this is done and the business has paying customers which allow the business to cover its operational costs and ideally generate profit, the business may not need to borrow money from elsewhere.
This is important for founders to keep in mind. When the business is generating enough money to run the business, it is not needed to raise funds again as by raising funds, the founders have to let go of their equity to investors. Considering your business requirement for raising funds and having a clear plan for the funds is crucial in making this decision. We cover the important of identifying the need for raising funds in our previous blog post ‘Is it a MUST for a startup to look for external INVESTMENT?
If the business is doing well and reached a level of sustainability, it is a good time to consider buying back the equity issued during fund raising. Most investors plan their exit strategies prior to investing; hence this could be a win-win situation for both parties.
However, there is an exception to the above, where fund raising is recommended.
In an instant where the business is venturing into new markets, new products or require significant amount of money to reach a bigger stage where the business is unable to fund itself for, then fund raising is still an option. It is important for any business to consider all possible pros and cons prior to fundraising, especially if it has reached a sustainable stage. This is because the risk of losing bigger equity shares could be dangerous for the future of the business.
Any decision made for raising funds needs to be well thought through and planned, hence if the business has a clear vision and direction and decide on the need for a fundraising round, this is still possible.
Keeping funds for growth of the business and allocating revenue generated for operations and ensuring all booked are properly kept, will help business founders navigate through building a successful startup, with less worries and pitfalls later on.