How to Know Whether You Need Equity Funding

A standard trajectory of a disruptive startup involves raising finance from external investors. Because of this, there’s an unspoken expectation that if you’re in the startup space, sooner or later you will be raising money. It can have a negative effect of putting pressure on founders to place fundraising over and above growing the business and finding paying clients that will extend its runway naturally instead.

Does every startup need equity funding? Most certainly not. Every startup that wants to be commercially successful needs an income stream though which could come from a wide range of sources: customers, debt finance, grants, and more. An important task of a founder is to understand which one of the possible income sources to focus on.

Startups that are suitable for equity funding are those which are highly scalable and can feasibly deliver a return on investment to their investors. They are typically product or productised service based. What goes with this type of finance is typically a founder’s appetite for rapid growth and building a type and size of venture which will end up becoming a market leader or, at least, a significant player in its sector. 

Startups that aren’t the best fit for equity funding are service led organisations, consultancies, coaching practices etc. It doesn’t have to be the case that your venture isn’t investable. Your ambition may well be to simply build a self-sustaining organisation (which I have done with GrantTree, a grant funding consultancy) that will provide for you and a team of others. You may want to retain control over your venture and not deal with the pressure of reporting to investors. If this is the case, focus on revenues.

To sum up, not every startup should and needs to raise equity funding. Whether you are the type of founder who has ambitions to build an investor backed imperium, or whether you are satisfied with a lifestyle business, only you can know. Each has its own set of rewards and challenges to navigate. What’s of great importance then is to do enough soul searching to understand what your goals are and what success looks like for you.