For startups sometimes more money means more problems
The Notorious B.I.G. said it best: Mo Money, Mo Problems. It sounds strange to most of us, mere mortals just trying to pay our bills and see the world. After all, wouldn’t more money give you access to better things and facilitate your life?
Sometimes that can be the case. And when you’re an entrepreneur money is one of your biggest worries. When you’ve developed your product or enterprise, more money is crucial in keeping the momentum going. However, overfunding presents a new set of challenges that could ultimately result in the end of your startup.
According to Capital Pitch, the self-proclaimed world’s first capital accelerator program, overfunding is “when a startup reaches its minimum funding target it can choose to continue to accept investments above this target level”.
Sramana Mitra, founder of the virtual accelerator 1Mby1M, has coined this phenomenon “death by overfunding”. Mitra recently made a case study of Nasty Gal’s rise and untimely bankruptcy, in part due to overfunding woes.
To avoid crashing and burning, entrepreneurs need to learn more about overfunding and how it can become a problem for your startup. Keep the following in mind:
After tirelessly working to achieve some form of success and recognition, growth signals a move in the right direction: more people wanting your product or service. Steady growth, growth you and your team can handle and adapt to the expanding customer base is ideal. If your venture is not equipped for it, hypergrowth could mean burnout.
Nasty Gal went from having $300 millions in sales in 2015 to having Boohoo, an U.K. online retailer, bid $20 million to acquire them in 2016. If you need more perspective, by its fifth year (in 2011), Nasty Gal was generating $30 million while still being a relatively small company.
Investors’ expectations can decide your future
It’s all about the ROI. An investor provides the capital needed so that your company is able to succeed beyond your dreams. And once you reach that point, you could be ready to sell and move on, but you cannot because the investors provided more funding than necessary and you have yet to meet their ROI terms.
Just as investors have a vetting process to decide whether or not to forge a financial relationship with your venture, it’s important to have a vetting process on how can invest on your company and how much you’re willing to accept.
Fundamentals: never forget your core
In the beginning, the idea was simple: to create a product, to provide a service, to solve a problem. That’s why your company is your baby. At its very it is what you believe in, your small contribution to the world. And while you are looking to have a successful business, the reason behind its creation should always remain in center stage.
Overfunding overshadows your core and takes away from your product or service. How many times have you, as a consumer, loved something only to end up disappointed and ultimately abandoning the product due to uncharacteristic changes?
In the grand scheme, overfunding will provide a correction to the startup world. That’s what Microsoft Corp. Chief Executive Officer Satya Nadella said to Bloomberg TV in 2015. “The beauty of overfunding is lots of ideas get to flourish,” said the CEO. “Out of that there will eventually have to be a correction, a bust.”
While many startups die slowly, sometimes penniless, it’d be sadder to close up shop due to overfunding and lack of adequate planning.