In “Why the Rise of Growth Equity Is Good for Business,”Â I outline two reasons why Growth Equity funds are on the rise. The first is that many businesses are successfully bootstrapping themselves to a successful business model. As they look to scale their businesses to the next level, they are finding Venture Capital to be too expensive and onerous and Private Equity to be too far out of their league.
But why raise capital at all? Wouldn’t it be best to continue bootstrapping?
In some circumstances yes, but, all too often, the bootstrapped entrepreneur fails to see the difference between “not needing capital” and having a “healthy balance sheet.” I couldn’t understand it until I saw it firsthand. An influx of capital that provides a healthy balance sheet can provide the following benefits:
It allows you to focus on the business.
Too often, when you’re cash-strapped, you focus on the economics. You manage toÂ cash-flow and spend more time keeping the business afloat than you do propelling the business forward.
By strengthening your balance sheet, you will empower yourself to think more about your business and your customer. You will spend more time thinking about the market and how to strategically invest to capture more of it. You’ll be focused on the business, not exclusively on your bank account.
It allows you to make strategic investments.
Even if you’ve found a way to free your mind, you can’t make strategic investments if you don’t have anything to invest. When you manage toÂ cash-flow, strategic investments become extremely high-risk decisions. Make one wrong move and you might be out of business.
Strengthening your balance sheet can reduce this risk and allow you to be more strategic in the investments you make.
It allows you to make timely decisions.
Being short on cash doesn’t onlyÂ prevent you from making the right investments, it also prevents timely decisions. One of the greatestÂ advantages an entrepreneurial business has is its ability to turn on a dime. Unfortunately, sometimes these pivots don’t only require time and focus, they require capital.
If you’reÂ manning to cash-flow, you may be unable to make the right decision at the right timeÂ – and time is always of the essence. Strengthening the balance sheet can allow you toÂ make the right investments at the right time.
One additional advantage of institutional capital is that it can help instill additional discipline. While many institutional investors are disruptive and challenging, finding the right one can also be an accelerator. Never seek funding for the sake of an investor, but, don’t underestimate the advantage having one can bring to the table.