Friday, 17 September 2010

Why Too Much Money is Worse than Too Little

Many entrepreneurs believe that the lack of capital is their primary problem. If only they had a fat bank balance, they could kick butt. As a venture capitalist, I’ve seen what happens when companies raise substantial capital. It’s not pretty—in fact, my theory is that too much money is worse than too little. Here’s why.

1.  Expenses expand to the level of funding.

Funny how this works: companies create projections that use the money that they have. The availability of money makes them think of ways to spend it, so there’s less emphasis on doing the right things the right way. The logic becomes, “Our investors gave us this money to invest, not to collect interest in the bank. They want us to scale up and go for it, so we should spend it. We know we’ll meet our milestones, and our competition is a joke, so we’ll always be able to get more money.”

  Money creates a false sense of security.

Companies divide the amount of money that they have by their monthly expenses. This figure is a company’s “runway” or the number of months that it can survive. There are three problems with this calculation: first, expenses always rise, so the number of months decreases. Second, products are always late, so that any revenue that company counted on to extend the runway don’t materialize. Third, just because a company has the money doesn’t mean that investors won’t ask for it back. Trust me: I’ve seen it happen, and no one was more shocked than the management of the company.

     Money makes companies hire “proven” people.

When companies don’t have money, they hire unproven people who are young, inexperienced, cheap and smart. When companies have money, they hire proven people from existing companies who are old, experience, expensive and lucky. These folks are accustomed to secretaries, first-class travel, and staying in the Four Seasons. You read it here first: proven people are over-rated. Oh, their resumes are great, and they look great on your website, but they didn’t cause the success of their former companies. They just happened to be there when these organizations succeeded.

     Money makes companies buy people with salaries.

No matter what kind of people you hire, when companies have money, they use it to hire them. This is instead of reality distortion (aka, “evangelism”) and stock options. The thinking about stock options goes like this: “Options are the most expensive form of compensation since the company is going to be bigger than Google and Apple combined. Let’s use money. It’s cheaper.” When a company doesn’t have money, it has to use evangelism and options, and this is better for everyone because these types of compensation attract the right kind of people for a startup.

     Money causes dependence on experts and vendors.

When a company has money, it looks outside for “world-class” experts and vendors
after all, “the investors gave us this money to build the best company possible in the shortest time possible.” This is when the consultants and agencies start charging the company $200/hour for the Asian art-history major who’s been out of Princeton for a year. If a company doesn’t have money, it figures out cheap ways to get results. It develops the aforementioned young, inexperienced, cheap and smart people because it has no choice but to make them effective. 

     Money makes entrepreneurship look like a serial process.

When companies have money, their thinking is serial: first they raise money, then they create the product, then they sell it, then they collect revenues, and then they meet with Goldman, Sachs for their IPO roadshow. The reality is that entrepreneurship is not serial—it’s a parallel process in which companies must raise money, create a product, sell it, collect revenues, and not have time to meet with Goldman, Sachs at the same time. Companies that work in a serial method are doomed because most markets move too fast for that approach.

If your company is short of money, I hope that you feel better now. The factors that ultimately make you successful may be in place. On the other hand, if your company has a boatload of money and investors who say that they “really believe and support your management,” keep your resume current.


  1. Your really a venture capitalist? I really want to be one, I guess it is a lot more difficult than it seems. Being a young college student, the future seems fraught with complications, everyones working so hard to obtain a degree, yet there will still be many failures among those who worked so hard... Its a tough world, thanks for the information though!

  2. I agree about the bit of money creating a false sense of security.

  3. cool!supportin bro :)

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  4. Hmm, that';s interesting. something to think about, i'd never looked at it like that, but can see your point.