Is Excess Money killing the Start-Ups?

Ever wondered what happens when just one extra atom of Oxygen (O) is added to the life giving gas, Oxygen (O2)? It turns into the toxic element Ozone (O3)

There’s a fallacy that the only way start-ups can fail is by running out of money. What’s less often discussed are the downsides of raising too much money and the circumstances of excess money heading the start-up towards counter developmental purposes. Funding under the wrong circumstances can often land the start-up in a position where good money is chasing bad money.

Check out the latest fundraising events in Indian Startup ecology to understand the trend.

Most of the entrepreneurs are of the opinion that funding is the solution to all the problems plaguing their start-up, and dive into the money hunt game. But seldom do they identify if that money is masking the real issues.

Diamonds are only made under pressure.

The essence of the start-up may be lost when there’s too much money at hand.

It is really necessary to understand the importance of a team in the start-up phase. The team is the heart of the start-up, the engine that keeps it going. This comes when there is a mutually shared ethos and passion for the start-up. It is not only the start-up that grows but also the team and its members.

There are certain moments in the life cycle of every start-up which add life to it, such as pulling off a successful marketing strategy despite having budget constraints, or the make-or-break moments where all the minds are put to use and the imagination and creativity of every team members synergies into making something exceptionally innovative, be it about the product or client etc These are times where the heart of the start-up, the team, elevates to higher levels of team spirits and personal developments.

The core point being that with enough cushion and deep pockets of the investor, there comes of a belief of infinite chances, and the team either never develops or sometimes even losses the skill of how to build a business that actually works on its own merits or without the crutch of investor money to keep things alive.

Premature expansion/scaling up.

At the start-up age the company needs to sow seeds for it to grow into something worthwhile. If it rushes into things too early, then other aspects of growth will get stranded.

The problem roots down to the psychological tendency to accept money when offered: the mere opportunity to take money more often skews a founder’s psychology into believing that growth and success will come faster. But this is definitely the wrong perception.

The disaster happens when the excess funding often pushes the start-ups towards faster growth, scalability and improving KPIs. Venture capitalist Guy Turner of Hyde Park Venture Partners says that "It's much easier to fail, learn, and adjust when you don't have investors. You can move faster, and there are fewer people to explain things to." Having an investor on board puts the team under pressure to show results. The team is constantly under the microscope and trying new ideas after failed attempts becomes very difficult. The true idea of innovating and adding value starts fading.

One thing that needs to be considered is to give every process its time. The idea may be phenomenal but, if it is not given its time to grow, will only lead the company to nose dive in the future. As mentioned earlier it is similar to using excess fertilizers to grow trees. The fertilizer may help the tree to grow faster but it may not help in growing a fundamentally strong tree which can reap ripe fruits. Excess use of it will only kill the plant.

Relentless Cash Burn is the new Cool!

Small symptoms which might later on lead to an epidemic are the needless expansion of costs. Spending those marginal extra dollars on ads, PR and marketing expenses without being able to measure the benefits of the same, excess overheads, going on a resource acquisition spree, getting a bigger and fancier office, to name a few. The extra dollar could’ve been put to better use such as R&D etc but only if the customer acquisition and growth did not get on their heads. 

It is necessary to strike a balance between the nice-to-haves from the necessities when you have some ideal cash laying in your bank account. Because the harsh reality is that everything may not be hunky-dory when the investors’ cash dries up, and cost cutting in the future might only be taken as panic on a sinking ship.

WeWork

This can be very well explained by the mess that WeWork has put itself in. Despite being valued at a whopping $47B (INR 3.35 lakh crores) the start-up has successfully managed to match the failure criterion.

According to the article by ET “…Burning through cash since its inception, it faced a crunch that could have left the company short of funds as soon as next month. Much of that binge stems from Neumann, a fierce and unpredictable negotiator unafraid of spending his way to growth...

PepperTap

Despite the lavish $51.2 Mn funding, the dream of being the largest grocery delivery company never saw the light of day. Some main reason for its failure were, Unsustainable Cash Burn, followed by a Funding Drought in 2016. click here

Vogo

The behavioral pattern of going on a resource hunt even at times of slowing economic growth can be observed in the bike rental start-up Vogo. click here

Hence, excess funding can be deceiving and the entrepreneurs must be prudent to not fall in the pit of the irresistible offers from deal-hungry investors. Even when capital is flowing from the peaks, don’t equate fundraising success with ultimate success. As obvious as it sounds, companies are valuable because they create value in the world.

Thanks if you came this far! ;)

Adios Amigo!