Entrepreneur lesson #1: Too much early funding kills a startup

My grandparents from my maternal side were farmers and had cows. Their mature milking cows were put in fields with lots of lush grass and could eat what they wanted. The young cows that hadn’t yet been bred were put in the fields that had already been cleaned out by the milking cows or on poor pastures. My initial belief was that this was a cost-saving measure as the young cows didn’t give milk yet, but that was wrong. The real reason was that feeding young cows just enough so that they don’t go hungry but stay lean causes them to become bigger cows when they grow up, with a stronger frame and better milk production.

The funny thing is that the same is true for startups. In my experience, having too much funding during the early stages of a startup is counterproductive and may well cause the venture to fail. Most founders I talk to about this shake their heads in disbelief as they feel they’re constantly scraping by, closing deals by bending over backward for customers and permanently walking around with a feeling that they’re deviating from the company’s original mission.

Also the fear of running out of money and disappointing the friends and family who invested their hard-earned savings as well as the employees who are depending on you for their paycheck is real and results in existential angst in anyone with a bone of empathy in their body. Nobody wants to be a failure and for all the noise of the “celebrate your failures” movement, everyone I know prefers to celebrate other people’s failures.

The point is, however, that in all your jockeying for closing deals with customers, being responsive to their needs and wishes, adjusting your vision to the feedback you’re receiving, you’re navigating the design space of your offering and gradually nailing the content and functionality you need to have to build a successful company. advertorial 

When a startup has too much funding in the early stages, the founders and employees tend to focus internally, build products based on their own opinions and ignore customer input. Because of this, the constant interaction with the market doesn’t result in a constant adjustment to customer input. Instead, the customer feedback is explained away and often translated into features that will be added to the offering later after we’ve built what we’re certain the customer needs.

Another consequence is that the company rapidly builds up to a burn rate that vastly outpaces the revenue coming in, causing a perpetual dependency on raising more money. And, believe it or not, raising money is actually addictive. In lieu of market success, it’s incredibly satisfying to at least have found investors who believe in your dream and are willing to carry the company forward for another couple of months. The problem is, of course, that raising money only confirms your storytelling ability, not the viability of the business. Also, all the time you’re busy raising money, you’re not building the business with customers.

There’s a time when startups really benefit from large amounts of funding, which is after they’ve nailed the offering to the market and the investment goes to executing a scaling strategy that allows for regional expansion as well as expansion to serve multiple industries. However, this should happen after you’ve nailed the offering and you have the revenue to prove it.

In the end, the balance for investors is to give startups enough funding so that they don’t have to raise money all the time and the founders can focus on building the business. And, at the same time, not so much that the company stops feeling the dread of possible extinction (staring into the abyss, as Elon Musk calls it), which causes the focus on adjusting yourself to customer needs rather than a fictive, unconfirmed belief about the market. As a founder, most of what you believe about your market, customers and offering is wrong, but you don’t know which part. Constant interaction with the market causes you to kill your darlings to get to a viable product and company that manages to become cash flow positive and, preferably, grow like a weed once you’ve nailed it. But for that, you need to stay lean, just like my grandparents’ cows.

Like what you read? Sign up for my newsletter at jan@janbosch.com or follow me on janbosch.com/blog, LinkedIn (linkedin.com/in/janbosch), Medium or Twitter (@JanBosch).