Too much funding can kill you

Most startups feel as though they don’t have enough money. Founders think “if only we had $X, this would let us do Y and Z, and be game changing for us”. Sometimes this is true, and sometimes it’s not.

On the other hand, I’ve never heard a founder say “if only we hadn’t had $X, we would not have unnecessarily done Y and Z, and we would have been a better company for it”. But although I’ve never heard a founder say it, sometimes this is also true.

I don’t blame founders for not being able to say this. From their perspective, more money gives them an ability to pursue more projects, hire more and better talent, and acquire more customers. They also believe that they will be able to stay grounded and spend the money responsibly.

However, pursuing more projects can lead to a lack of focus which lowers your performance in each project, growing your team prematurely can lead to bloated fixed costs, and acquiring more customers can mean spending on unprofitable marketing channels. In addition, it’s the rare mission-driven individual who can stay hungry and disciplined after being given a big check. Most people default to thinking that they’ve made it.

If it’s naturally difficult for founders to see the costs of raising too much money, it’s their investors’ responsibility to communicate this. Having seen tens of companies, investors are well positioned to know how much is too much. They also have skin in the game, and are therefore properly incentivized to do what’s right for the company. There can be exceptions to this, like large funds who need to deploy a lot of capital encouraging their founders to take more money than they need, but the interests of most investors are largely aligned with those of the company.

So when an investor says that a company is raising too much, founders should listen. The ultimate decision is up to the founder. However, your investor just might be saving your company a few bucks, or in some cases, your company’s life.