As a venture capitalist, I’ve seen on many occasions what happens when companies raise substantial capital. It’s not pretty — in fact, my theory is that too much money is actually worse than too little. Here’s why.
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.’
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 any revenue the company counted on to extend the runway doesn’t materialise. 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.
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, experienced, expensive and lucky. These folks are accustomed to secretaries, first-class travel, and staying in top hotels. You read it here first: proven people are overrated. Oh, their CVs 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 organisations succeeded.
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 start-up.
Dependence on experts
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.’ 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.
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 follow a multitude of steps and don’t 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 CV current.