As the cynics around us, and sometimes within us, often point out: nothing in this world is really free. Sad as this worldview may be, in business it sometimes proves to be very apt especially when it comes to the resources used to start your venture. Over the years I have watched as entrepreneurs, of all ages and levels of experience, are drawn to funding that appears to come with no commitments attached (arguably the best kind) only to find their businesses suffering from a few unforeseen side effects.
It can impair your creativity
Free capital for your business is a blessing that very few of us are lucky enough to have received or ever will and is for the most part a very fortunate occurrence. Unfortunately it brings with it a few challenges that can quietly ruin your entrepreneurial adventure if they are ignored. Startups, by their very nature, have low chances of succeeding and growing onto become profitable ventures. One of their greatest weapons in combating established players, with vastly superior resources, is an abundance of creativity and the willingness to use it. If a startup receives funding in its very early stages, an inexperienced team may attempt to make up for their inadequacies by rashly throwing money at any challenges that stands in their way.
Because money vastly increases your options on how to wriggle out of even the most basic of problems, it stamps out ingenuity, thus giving rise to formulaic business models. The abundance of funding in Silicon Valley is one of the reasons that the majority of startups have an almost exact revenue strategy i.e selling ads.
For a young fledgling business helmed by an inexperienced and always overwhelmed team they are few things as tempting as the offers of the so-called business consultants that appear to have mushroomed everywhere in recent years. These individuals claim to own a bag of solutions for every conceivable problem that your business may run into, for a fee of course. If you are particularly unfortunate, you may actually subject yourself to the ramblings of someone who is almost as clueless as yourself.
It allows flawed ideas to survive
Dangling free funding in front of potential entrepreneurs is one of the reasons that some of the worst business ideas are able to make it past the pieces of paper upon which they are hastily scribbled, to a form in which they can disappoint actual customers. Startup and business plan competitions are the worst culprits. They tend to attract dubious business ideas that sound brilliant in a five minute pitch. A lot of the winners of these competitions are then left to their own devices with great funding and the task of implementing their not-so-great ideas that are doomed from the word go.
It encourages financial irresponsibility
Startups, especially ones that are yet to turn a profit have to be frugal because money is the lifeblood of any business. Running out of money is often cited as one of the most common causes of all small business failures. If these ventures receive their funding too early in their lives, particularly the free kind, the opposite behaviour is encouraged. This gives rise to startups that throw money at all their challenges or even worse: simply pay someone else to come up with solutions for them (business consultants).
The purpose of a business is to make its owners money. Most founders do their best to make this a reality for their new business as soon as possible. Unfortunately any funding that arrives before that goal is achieved has the effect of somewhat pushing the pursuit of profit to the back of the founder’s mind.
Money that you did not lose any significant amount of sweat to acquire has the added disadvantage of making you a terrible negotiator. This is caused by by your inevitable failure to appreciate the value of the ‘gift’ money that you did not earn, making you more receptive to bad deals, be it your office rentals, paying for labour or raw materials.
It can crush your team spirit
Starting a business is a very hard and lonely endeavour which a very few people have the spine for. A new business needs committed founders who share the same vision and are willing to put in the required investment in time and effort for rewards that are neither immediate nor guaranteed. The presence of funds in a budding company has the disadvantage of allowing undedicated souls, who would have otherwise removed themselves earlier, to flourish until they reveal their lack of commitment at the most inopportune of times (when you run out of money and need them more than ever). Large amounts of free funding can also dampen self-motivation and turn founders into what are effectively salaried employees who are just going through the motions just so that they can reward themselves with clear consciences, until their coffers run dry, that is.
However free funding for your business is probably one of the best and most thoughtful gifts anyone can receive if you can manage to maintain your focus and rein in your desire to ‘go wild’.