By Olivia Robinson

Like any financial operation, the opening of capital to investors has advantages and disadvantages, which it is important to know and take into account before launching.

The main disadvantages of opening up capital

The main drawbacks of going public are as follows:

• Significant time to devote to it. Fundraising is always time-consuming. You will not be able to devote yourself 100% to operations. When the size of the team allows it, it is also recommended that a partner can devote himself mainly to fundraising.

• Less autonomy in the management of the company, because it is accountable to the other shareholders. It is common for investors to occupy a seat on the Board of Directors or the Supervisory Board, with significant weight in strategy and decision-making.

• A dilution on profits due to the number of shareholders. However, it is better to own a lower percentage of a company that has value than a higher percentage of a company that fails to grow.

• Sometimes divergent interests and expectations between the company/entrepreneur and the investors can make communication and collaboration difficult.

• A different level of involvement: The entrepreneur experiences the reality on the ground while the investor follows the company less operationally.

• A different time horizon: An institutional fund generally lasts 10 years. Investors tend to be in a more short-term logic than the entrepreneur.

• Different liquidity constraints: Investors’ exit needs can lead to the sale of the company in the medium term. The calendar imposed by the investors will not necessarily be the best for the entrepreneur and the company.

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The risks of opening up capital

On the other hand, embarking on a fundraiser can present risks for the entrepreneur and the company, namely:

• A failure of the fundraiser. Investors are selective, and not all projects find funding from private equity. The risk is then to have devoted time to fundraising while neglecting the business, and thus to put the company in a dead-end in the event of failure of fundraising.

• “A pretext” to delay the moment of confronting the market and customers. Some entrepreneurs embark on a fundraiser to postpone the confrontation with the market. This strategy can only be harmful to the company. You must first try to develop with customers before seeking financing from financial intermediaries.

• Too much fundraising can encourage spending too much and going too fast. The investor may have an interest in investing a lot of money for the success of his investment strategy, and not in the interest of the company, nor according to the needs of the company. Conversely, it can be bad for the company to lift too much and put too much “fuel” in its engine. The company and its teams must be ready to ensure the planned development, otherwise, the company may collapse.

• Raising funds too early and at too high a valuation entails a risk of significant dilution in the event of a subsequent funding round. If you raise very early at a high valuation, you will be satisfied on the spot. But when you need to raise again, if you have not grown the business enough, you will be forced to accept a new fundraiser at a lower valuation. Your business consultant can help you with this. Also, there are several things that your business needs to know about tax audits that can help your business in the run.

• Disappointed expectations regarding investor support. The reality is that the investor participates on average in 5 to 10 boards of directors or supervisory boards in parallel and that he has only a little time to devote to each participant.

• A contribution of experience from investors who may have faults. An investor has participated in the boards of dozens of companies, which gives him experience in various situations and sectors. Thus, he can be an excellent adviser, but he can also be led to generalize and to consider that his experience makes him more relevant than the entrepreneur (who is nevertheless in the field).

Benefits of going public

Fundraising does not only present disadvantages and risks, fortunately! Here are the main benefits it can provide:

Financial benefits

• Increased financial strength, which significantly improves perception and relationships with suppliers and customers
• A reinforced cash flow, which secures the company
• Measured medium and long-term debt, and no new short-term debt. Investors are mainly remunerated on the capital gains made on the resale of their participation, and very little via interest (be careful, in the case of investment in the form of bonds, these are associated with interest)
• Financing without the contribution of personal guarantees from the founder
• A leverage effect with other types of funders. The entry of investors into the capital allows a leverage effect to access another financing, such as bank financing, public aid (often linked to a level of equity: subsidies, repayable advances, etc.).

Advantages of another kind

• An additional contribution of value by the new shareholders to boost the company’s capacity: contribution of expertise (technical, strategic), experience, network and address book
• An outside perspective that allows you to take a step back, and helps to build a strategic vision (frequent presence in governance bodies)
• The possibility of growing through internal growth and external growth. Good cash flow makes it easier to make acquisitions
• More credibility: The Company often needs to have certain credibility vis-à-vis its customers (especially large accounts) and suppliers to develop. One way to establish this credibility is to have reputable investors in the capital
• Business security. Raising funds when you don’t need them brings financial security, and allows you to better cope with crises
• Security for the contractor. Appealing to investors to strengthen the company’s capital allows the entrepreneur to keep his savings, and not to have “all his eggs in one basket”. This allows him to be more serene and to keep his cool in the event of a crisis.

In summary

Going public is relevant provided that the entrepreneur is well prepared for it and is well aware of the advantages and disadvantages it represents. In particular, it is necessary to be vigilant about the adequacy between the constraints and the interests of the company, and those of the investor.

Author Bio:

Hi, I am Olivia Robinson, a writer, and blogger by profession. As I’m a wanderer, I share my experiences through my write-ups in a way that it’s understandable and appealing to people. I aim to achieve a difference through my writing, which allows my readers to make informed and valuable choices.