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Q: How does an entrepreneur or business owner know when it is right to gut it out and self-fund their business vs. when it is right to seek outside capital to make the journey easier and grow faster?

Bryan Clayton, CEO
GreenPal

A: The job of your private business is to maximize your utility, so the first question is what are the priorities of the owners' wealth creation or control of the business?

If the priority is wealth creation, then you will generally need to seek outside capital and expertise as soon as possible because you are in a race to own your market. That means you need to reach as many customers as possible and build as strong a brand as possible as fast as possible to maximize the potential of your venture. In order to achieve these goals, you are going to need a substantial investment, probably raised over several rounds.

If you are building a business that you want to continue to own, control and run for years, then you will need to build it through means other than raising outside capital. You will need to self-fund, which means personal loans, cashing out 401ks, using bank lending, SBA loan programs, friends and family and any other sources available to you. It also generally means growing more slowly because growth requires a lot of capital.

If you decide to raise outside capital, the question turns to when. Accomplishments are power. Getting to revenue equals power. Patents equal power. A larger customer base equals power. Expanded geographic markets equals power. The more you accomplish, the higher the valuation of the business, the stronger your negotiating position when you raise capital and the more ownership and control you will be able to maintain. Of course, you also increase your risks because bootstrapping and self-funding slow you down. So the timing of raising funds is a question of balance between speed, control and personal preferences.

In weighing all this, there are a couple of things to keep in mind — raising capital takes time. Begin laying the groundwork early. Talk to potential investors long before you are going to raise capital. Keep potential investors informed of your accomplishments. This will maximize your position in the negotiations to follow.

David Deeds is a professor of entrepreneurship at the University of St. Thomas Opus College of Business.