I have been talking with a couple of contacts recently who are looking at moving their bootstrapped business into the world of a funded startup. In the process of working with different VCs and angel groups, they of course get the question “How much money are you looking for?”
A piece of advice for every entrepreneur out there – don’t raise too much capital. It is critical for you to understand the difference between what you “need” and what you “want.” This basic guideline that us parents so often explain to our children will serve you well as an entrepreneur looking for money. It is so tempting to pad your funding requests to give yourself a safety net and provide additional opportunities to hire new employees with the intention of expanding your business faster. It is all the more tempting because VCs often are part of the problem here. They often will have minimum investments to even be interested. In addition their requirements for the return on their investment will often push you toward a business plan that has unrealistic growth expectations.
Here’s the big problem – raising more money won’t make your company grow faster unless you simply have so much customer demand all ready that you can’t meet it. With almost every startup I have come across this is not the case. They are looking at their fundraising as a way to establish a much needed team, begin or expand marketing, and hire the sales force. In fact, not only will raising more money not make your company grow faster, it can actually put you on a path for disaster. Here are some of the problems that too much money can cause:
- Expanding headcount too fast – Every VP you hire dramatically expands your headcount. Keep in mind that every VP you hire will be looking to build their team. Do you need a VP of Marketing, Business Development, or Sales? It is a sure sign of a problem when a company of 20 people has 5 VPs and a CEO.
- Unproductive projects – This problem often stems from the one above in that too many managers leads to unproductive initiatives. One of the biggest offenders here? Partnerships. I can’t count how many unproductive partnerships I have come across that involve significant travel, executive time and no meaningful outcome.
- Unrealistic sales expectations – Just because you put it on a spread sheet doesn’t mean it will happen. When you have too much money often the answer becomes “hire more sales reps.” This is the first step toward abject failure. If your existing sales team isn’t exceeding quota, why in the world you you hire more sales people?
- Wasteful spending on office space – Of course if you are looking at your business plan you have to plan for growth and you need to present a professional image. Right? … Wrong. Too much and too nice of office space can often become the albatross around your neck. Don’t believe your own business plan believe results. You shouldn’t plan to move until you are absolutely bursting at the seams and are confident that you are experiencing sustainable growth.
- Careless budgeting – Another thing that too much money can cause is carelessness with your investments. You should have the level of scrutiny of your expenses that you would if the money were coming directly out of your pocket. Understand the value of all your expenditures to your business and demand accountability for everything.
- Too much marketing – Marketing can become the sink hole for investment capital in a hurry. Between events, PR, direct marketing and advertising (God forbid), your budget can explode. I wrote an article for VentureBeat recently that addressed “How to determine if your marketing is worth the cost.” If you raise too much capital it can be easy to miss unproductive uses of your resources.
- Believing your own hype – If you raise millions of dollars, don’t believe that this is an assurance that you have made it. Stay lean. Stay hungry. Be paranoid. Be skeptical. More than anything you should be on the alert for a belief that your funding means that success is your destiny. It isn’t.
Don’t get me wrong. Raising capital is a key component of giving your startup a chance to be successful. Just be sure to raise only what you need and don’t forget that this is your company and it’s success depends upon wise use of that capital.