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August 09, 2012

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Your last point is the most important. This might be a measure of how viable the business is and the importance of outside help. 1) if you can't get outside funding, that is a signal that the business is not as viable as the entrepreneur thinks and/or 2) getting outside funding comes with advice/support and/or 3) the process of applying for outside funding makes the entrepreneur think through the business plan more carefully and confront problems & refine opportunities better.

The case in point: What about small business owners with very little chance of raising startup capital through investor borrowings? There is very little chance of that happening unless you can find investors who are ready to buy into an idea. Moreover, I believe that when its your money, the chances of playing a disciplined game is much higher than playing with someone else's money. Simply because, you can just have your business declare bankruptcy as an escape route in case your business tanks. However, using your own capital by borrowing against yourself makes it a dead end situation where you either strive to perform or sink under a mountain of business debt which you cannot discharge without adversely affecting your finances.

I don't think this can be applied globally. The geographical diversity in terms of comfort level of investors to fund idea stage companies is huge. There are so many places which still do not have a vibrant idea stage funding culture and the investors expect the entrepreneurs to build the idea to a prototype stage and then seek funding. In such scenarios it is expected that the entrepreneurs will put in money from personal resources which could be personal debt.

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