Knowing how much money you need can make all the difference in your venture capital experience. It starts by understanding how much money you need and only raising that much money. Raising too much money can force entrepreneurs to make decisions they aren’t ready to make.
At some stage, a startup may need to raise a lot of money and stop being capital efficient in order to scale. The trick is to recognize the right timing, which is often later than entrepreneurs or investors expect.
Raising capital, I always tell people that you obviously need to raise capital but be careful about raising too much. You start by raising a “smart” amount enough to really get going. Why do I say this? There are people who build an interesting idea. It gets competitive. They have talents, influence and they can raise too much capital than they really need.
In a business, there are two problems with raising too much capital too quickly:
– Number one is the expectations of you are that you’re going to do something big and you got to go fast, and I say it’s like adding rocket fuel before you really know where the rocket is pointing. It’s very destructive to a company. You will feel pressured to spend it and you’ll feel pressured to go fast.
– The second thing is you take all your options off the table. Whatever you’re building isn’t working, wouldn’t you like to have some option to safely park something, meaning a sale that’s not huge but at least preserves what you’ve built, preserves the customers, preserves some of the jobs from the people you took out of their other companies and maybe creates a little bit of wealth for yourself? You give up that option if you raise too much too quickly.
Then, having too much money too quickly stops a startup from fulfilling its primary function: to iterate its way to product/market fit.
Startups with lots of money don’t need to pivot. They can tell themselves that the problem is with the sales team, or with customers not understanding the product, or with usability issues. They tinker under the hood instead of understanding the market. They spend money on a sales force to pitch, instead of forcing the CEO into the marketplace to hear from his prospects why they are not buying. They execute, execute, execute. Against a business model that does not work. Raising money is a great thing. Having lots of it is a wonderful comfort. But for a startup trying to find its place in the market, it can be disastrous.