“Some companies are too early in a market. This happens often, and the most common scenario where it would happen is where an idea that is working in an advanced market is transplanted to an emerging market. In my opinion, the biggest threat for such a company is raising too much funds very early.” – Mark Essien.
Well, while this is not my entire opinion, but Mark Essien’s, it is one that I align very much with. The quote has expressed the totality of my thoughts which have drived me to write on if your startup could be termed too early to receive too much funding. Of course it could.
Have you ever launched a startup in an emerging market? A market that isn’t yet ripe for your kind of service? Then as Mark has advised, it would be very not tactical, or wise for you to accept funding that would let you live above your means.
Startups in emerging markets
For the fact that the market you just launched into is still emerging implies that there are limits on the revenue you generate, and the profits you are likely to make (if any). So, it would be in your startup’s best interest to run on a pretty tight budget.
The importance of running on a tight budget here cannot be overemphasized. You would need to keep costs on the very low, so as to enable your revenue cater for the startup. But then, an investor comes along and wants to invest over $200,000 in the startup.
First, we do have to fault the investor for NOT doing his due diligence well to find out that the market he wants to pour funds in is still emerging, and very unripe for such huge investor. But in this case, the investor isn’t the case study, you are.
How about a huge funds investment?
You want a free advice? Such investments in such times are to be out rightly rejected, or rather pended till further notice. ‘Further notice’ here could mean till when the market is very ripe and is ready for your service. If this is not done, you would tend to start living above your revenue generation which could spell doom.
Let me guess that the first thing you would do with the funds is acquire a new office space, then you’d increase your workers salary, and employ more, then you intensify marketing (which would not yield noticeable results as your market isn’t still ready), and many more like it.
While all the above are very good, it would surely come to a point where you would desire to see results and returns of your ‘investments’, but nothing would show up. You would expect there to be increase in your revenue, and profits, only to discover that they were on the same level you left them months ago. Now, this revenue can no more pay for your office space, and workers salary comfortably. This is the beginning of the end.
So, when is the right time to accept funding for your startup?
At the moment when you discover that the market you address is very ripe for you, and your startup is booming, having enough revenue to cater for main things like the office space, employee salary and other basic necessities, such that the next step left for you is expansion, then I think you have found the right time to accept that ‘big investment’.
On the other hand of the investors, there are some markets which are very unripe for your funds YET. What makes you a good investor is the patience you can garner before that market becomes ready. Investing huge funds in startups that address a premature market could spell doom for it, and your money.
