Should You Raise Money for a Product Business?

Founders ask me this most weeks. It always arrives in the same shape. The business is working, the orders are getting bigger, and there is never any cash.

So here is the answer up front. Most product businesses do not need investors. They need a smaller order, better supplier terms and more room between deposits. Raise money when you have demand you physically cannot serve. Not when you are tired.

Do product businesses actually raise money?

Some do. Far fewer than the internet suggests.

Almost every article about raising money is written for software. Software buys people and time. The money goes into engineers and the product gets better while they work.

A product business buys stock. The money goes into a container and sits there until someone pays for it.

That difference changes everything about whether investment suits you. Investors price on growth and on what the business sells for at the end. A business with real stock, real freight and a real warehouse grows more slowly than software, and it sells for a lower multiple at the end of it.

That is not pessimism. It is arithmetic, and it is worth knowing before you spend six months pitching.

What are you actually short of?

Before you raise anything, work out which problem you have. There are three and they look identical from the inside.

A timing problem. The money comes back, it just comes back later than it went out. You paid a deposit in March and customers pay you in August. This is how money actually moves through a product business.

A margin problem. You are selling, but there is not enough left per unit. That usually means you are pricing off the wrong number.

A demand problem. The stock is landing and it is not moving.

Only the first one is a funding problem. Put money into the second and you lose it faster, on more units. Put money into the third and you buy more of the thing nobody wanted.

When does raising money make sense in a product business?

Four situations where I would not argue with you.

1. 1You have orders you cannot fill. Not interest. Purchase orders with names and dates on them, from people who will pay.
2. 2You need tooling. A mould is a genuine one-off cost that lowers your unit price for years. That is capital doing what capital is for.
3. 3You are going from one sales channel to several at once, and the working capital gap is real and temporary.
4. 4The person writing the cheque opens a door you cannot open yourself. A buyer, a market, a distributor. The money is the smallest part of that deal.

Here is the test I use. Could you get to the same place in twenty four months without the money? And is twenty four months too slow for a reason you can name out loud?

If you can name the reason, raise. If the reason is that you are sick of waiting, do not.

When is it the wrong call?

When the money is really a wage. If you are raising so you can pay yourself, that is a different problem with a different fix.

When you have not been through one full reorder cycle on your own money. Deposit, balance, freight, sell through, fund the next order. Do that once before you ask anyone else to back it.

When it is a way of avoiding a hard decision about a product that is not working.

When you are tired. Money does not make you less tired. It adds reporting, a quarterly meeting and someone else's opinion about your next range.

What to do instead if you just need stock

This is where most of the answer actually lives. Six things, roughly in the order I would try them.

Cut the order. A smaller run you can pay for beats a bigger run you cannot. Here is how to work out how much stock to order.

Get the minimum down. Most founders accept the first MOQ they are quoted and never test it. The execution detail sits on my sourcing site: seven ways to negotiate a smaller first order.

Change the payment terms. Moving a $40,000 order from fifty fifty to thirty seventy leaves $8,000 in your account for about three months. Illustrative numbers, but that is the shape of it. This is how factory payment terms actually work.

Sell it before you ship it. A pre-order is a customer funding your production run at zero percent interest and no equity. Here is how to run a pre-order launch.

Use debt rather than equity for a short, predictable cycle. Stock that turns in ninety days matches the shape of a ninety day facility. It does not match the shape of selling a piece of your company forever.

Sell what you already have. There is usually cash sitting in a slow line, and clearing it is faster than raising.

Say a production run lands at $40,000 and you are $15,000 short. Cutting the run by forty percent costs you a little on unit price and none of your ownership. Shifting the deposit terms moves $8,000 out by a quarter. Between those two you are no longer short, and you still own all of it.

Raising $15,000 for a slice of a business you want to keep is expensive money for one order.

What does an investor actually cost you?

Not just the percentage.

• Control. Small cheques can still carry a veto over the things you most want to decide, like range, price and when you discount.
• Speed. You will stop making calls in an afternoon.
• Your hours. Reporting is real work and it comes out of the same week as everything else.
• The ending. An investor needs an exit, and their timeline becomes part of your planning.

That last one is the one founders underestimate. It is worth understanding what selling a product business actually involves before you agree to a timeline for it.

The cheapest money in a product business is still a customer paying you before you ship.

What I would ask before signing anything

Seven questions. Write the answers down rather than thinking them.

1. 1What do I want this business to be worth, and by when?
2. 2Does this investor need an exit, and on what timeline?
3. 3Which decisions do I stop making on my own?
4. 4What happens to this deal if the next twelve months are flat?
5. 5Would I still do it if the money were twenty percent smaller?
6. 6What does the money buy that I could not do more slowly?
7. 7Have I asked my factory for better terms yet?

Most founders have not done the last one. It is free, it takes one email, and it has fixed more cash problems for the people I mentor than any raise ever has.

What I got wrong

I built Incy Interiors from a country town in New South Wales. It started because I could not find a cot I liked for my son. It grew past eight figures and I sold it.

The mistake I made, more than once, was ordering too much stock. Every time, I was buying a future I had not sold yet.

When cash got tight my instinct was to go and find more money. The better instinct, and the one that took me years, is to make the business need less of it.

I cap my jewellery drops at twenty units a style now. That is a decision to stay small on purpose. It is also the reason I do not need anyone else's money to make the next one.

Staying small on purpose is a strategy. It is not a failure to raise.

Working out what your product costs, what it should sell for and what the business can fund on its own is what we go through inside Start Here.

The question is almost never whether you can get the money. It is whether you will still want the business you have afterwards.