With the influx of seed money, much has been written about the fact that start-ups that are taking far more funding than they need. For example, check out Fred Wilson’s post where he compares funding a start-up to walking up a flight of stairs. When building a company, it’s smarter to hit each step on the way up rather than jumping over three, landing on the fourth, and potentially falling all the way down.
I know. Being swamped with funding is a problem that most early stage companies would love to have. However, as an investor watching my portfolio companies and other start-ups in the market, I can see how large rounds negatively impact the culture of budding business. On a personal note, I’m the first to admit that we had too much funding with my start-up back in the days.
What’s the issue with too much funding? Here are four key drawbacks:
Pitfall 1: Solving every problem with non-scalable hacks
At the beginning, it’s important to do things that don’t scale, especially when it comes to customer acquisition. As Paul Graham said, “startups take off because the founders make them take off. There may be a handful that just grew by themselves, but usually it takes some sort of push to get them going.”
In the early days, you’re going to go through a lot of manual, laborious steps to get things moving. And that’s okay. However, this mindset becomes a liability when every problem gets solved by manual hacks instead of scalable solutions. Companies with limited funds are more invested in finding those highly scalable, no-touch solutions that are needed to rapidly grow.
Pitfall #2: Losing creativity
Some of the world’s best ideas are born from necessity. When you have the luxury of abundant resources, you lose the creative push to make something happen out of nothing. A perfect example is when businesses are suddenly flooded with cash, they opt to buy the biggest trade show booth rather than thinking of creative ways to gain attention via smart guerilla marketing around the expo center.
Pitfall #3: Tackling too many things at the same time
Every start-up will have more opportunities than they can possibly tackle. The most successful start-ups and founders are those that limit themselves to being very good at the right things.
Too much funding removes the natural limit on how many opportunities you can go after. The result is an unfocused business that is haphazardly working on many projects and is mediocre at all of them. I’ve seen many start-ups rush to hire new staff and tackle brand new verticals or international markets when it’s just not time yet.
Pitfall #4: Culture of “we’ve done it”
Funding rounds are only intermediate steps on the way to building a great, lasting company. The problem with a large funding round is that it can change the company culture from the scrappy challenger to “we made it.” Companies lose that hard-working, aggressive ethos and take on a more complacent, free-spending attitude.
For an example of how to do it right, I’m always amazed at how Jeff Bezos has managed to keep a start-up culture at Amazon despite it’s being a billion dollar company. Amazon is known for its peculiarities. The desks are re-purposed doors and some senior executives still take the train to the airport instead of a cab or limo.
Final thoughts: Too much of a good thing…
I’m sure I won’t convince every entrepreneur to turn down the cash. And certainly, there are times when it’s wise to take a huge round (such as to protect yourself from a potential downturn). If you do take on too much money early on, congratulations on the success- but be aware of the potential consequences and manage them proactively.