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Why Startups Shouldn’t Always Take Outside Money

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The Entrepreneur Insiders network is an online community where the most thoughtful and influential people in America’s startup scene contribute answers to timely questions about entrepreneurship and careers. Today’s answer to the question “Is it a good idea to build a startup without investors?” is written by Tai Lopez, investor, business advisor, and a member of The Oracles, a brain trust of high-level entrepreneurs.

Should you build a startup without outside investment? It’s a question many entrepreneurs face. And there’s no one correct answer to it.

First, if you want to go really big, you’ll probably have to raise investment capital from an outside source. But you can still get to a relatively large level by bootstrapping—this consists of taking the money that you make in the first year, paying yourself a little bit, then rolling everything else back into the company year-by-year. However, most huge companies—or ones that became colossal like Facebook or Tesla—at some point have more opportunities than capital, so raise outside cash.

I try to build some businesses with no outside investors, so I have the advantage of 100% control. I like to have at least one running business with no outside investors at any given time. That way, I don’t have to answer to anybody or push for certain profits just to achieve milestones dictated by investors or a board. Don’t underrate this kind of freedom: While investors can be great, outside parties may push you to make business decisions that create short-term wins for them but are not in your long-term best interests.

Having businesses both with and without outside investment gives me the benefits of complete control, while allowing me the freedom to take on investment and swing for the fences with companies that could become gigantic.

For me, that’s the happiest medium. If you put all your eggs in one basket, you can quickly get into trouble. For instance, I have a friend who raised over $50 million to build a company and told me he’d probably never do it again. Why? The company is worth a couple hundred million dollars, but he doesn’t own a lot of the shares anymore. The other investors won’t sell him any more shares because they want to hold out until the company is worth $1 billion. He wants to sell and walk away with a lot of money, but he can’t because he no longer has control.

 

That’s one downside of bringing on investors. Understand that your financial outlook and exit strategy are highly dependent on what type of investment structure you’re using.

However, there are big upsides to taking on outside investment that you should also consider. If you bring on investors, you risk someone else’s cash. If it doesn’t work out, you just walk away. You only lost your time. You didn’t face complete financial ruin because the business didn’t work out.

Every action has an opposite and equal reaction. If you raise capital, it comes with pros and cons. That’s why I like a happy medium where I do both—companies fueled by outside investment and startups that I simultaneously bootstrap. I find that’s the best way to have your cake and eat it too.