How Too Much Capital Can Ruin Your Startup Edge
Generally, startups have very few things going for them. No one has ever heard of you. You have no reference customers. Your team is most likely new to business with few credentials.
But, startups have a couple super powerful things that make them win against bigger foes. I think two really matter:
- Extreme focus. Startups are laser focused on solving one problem. Focus is a massive advantage that drives better customer understanding and usually brings new thinking to existing problems.
- Organizational alignment. When you are small and focused on one thing…well, you get a team all rowing together. This is why small teams are so powerful — they are totally aligned with everyone scrapping to achieve a common goal.
Startups that harness these strengths are inevitably inundated with offers of capital. And, the check sizes are growing. The massive increase in venture dollars, fund sizes and overall firm numbers, means a small startup could suddenly find itself with a massive injection of capital. In most cases, especially for B2B companies, I think these large capital infusions weaken the few advantages that startups have.
Here is a typical scenario:
You are a 2 year old SaaS company growing like a weed. You are about 3m ARR and growing 100%+ a year in a hot market. You are burning about 500k/year. The Sand Hill bake off is a joy — you get tons of attention from all the big players and the offers stream in…and they are good! $10m from the Tier 1 players. They have to get 25% so, that means $40m valuation.
Wow — you are a rock star! But, then what happens?
Well, you start to spend it! Your $40k/month burn goes to $400k — then $800k. You are going for it. And the VCs are all for it. They want to see fast how big this thing can be. And what are you spending it on? A horde of people that you can’t manage. Massive amounts of ad words. Fancy team and customer events to make you look (and feel) big. Big time execs — often from large companies — that don’t fit your culture and can’t perform without a ton of pieces around them. New product initiatives — anything to win the deal and keep the growth up.
You are going to have to raise again soon — you have to keep winning!
All the while, have you gotten more competitive? Unlikely. Why? You have lost your advantages. Your focus is now massively distributed — less on customers, more on internal problems and politics. You are solving many customer needs now as your product expands based on inbound requests. And your team is confused. They are onboarding new people, fighting for turf and trying to figure out what success looks like. All the while the pressure mounts — you have big burn now and a deadline emerging to raise more to refill the coffers.
Can this all go the other way? Of course. But the point is, rarely does a ton of new capital itself accelerate a business. The lack of constraints distracts you, drives waste and, most importantly, clouds you from the biggest problem — solving real customer issues.
So take capital, especially a lot of it, at your own risk. My recommendation is whatever dollars you raise, run your company like they are the last you will ever see. The discipline will preserve your advantages keeping you focused on making tough prioritization choices inevitable with real capital constraints — not to mention you will continue to own more of your company!