> Remember that raising money is not success. Raising huge amounts of money early on is very rarely how companies win (though it is sometimes how companies lose)
I honestly think one of the reasons the company I worked for was successful was our inability to raise money while we were young, which forced a real discipline and creativity for how to do more with less. It also made us skeptical of investors and ensured we didn't base our internal feelings about the company based on what a bunch of incredibly fickle investors thought. This was important both when investors hated us, and perhaps more important when they switched and loved us.
And to the second point, I saw first hand how easy money made one of our competitors so cocky they had no chance of success, and another one got too much money and got distracted spending it all to actually make a core business that made sense.
Money is necessary and important, but having too much of it is also a risk that you need to take seriously.
Counterpoint: if you're running out of money, the next investor you try to raise from is going to be tough to negotiate with. If you have years of runway left, you're in control when talking to investors, when you have 6 months, they're in control. Another point is that when everything comes down crashing, as it did in 2008, and you can't raise money anywhere nor, in many cases, make a profit in the near future since demand for everything also crashes, then if you've squirreled away enough money, you don't have to fire anyone, nor close shop.
This is not to say that too much money can't cause the problems you mentioned. The cure is to keep the money in the bank and not spend it.
All of the above is what my employer did, not my own personal idea. (Also no VCs, these gut the company if it's neither public nor profitable in 5 years, or at least they used to.)
I like your idea (actually i practice it), but your investors aren't putting a lot of money in your hands so you keep it at the bank to them, right? They could do that for themselves.
By experience you don't need years on cash to survive in the long run, discipline and a business that makes sense is way more powerful.
But off course, months of runaway is necessary. More than that is luxury.
Investors put money in the craziest places, surely there's a public story stock right now that you think is inflated beyond belief and yet it trades at the price it does. It follows that investors will do crazier things than give you money to keep in the bank if you persuade them.
You tell them point blank, "we're hoping to make it big this year, but we aren't taking any risks and we're gonna keep enough cash in the bank for the 3 next years. If you don't like this plan, fine, you're missing a chance to buy a stock that's gonna shoot up 10x and here's why", and they buy your pitch, they're gonna beg you to take their money.
I'm not saying I can do this, I'm saying people exist who can, and there are markets where things are measured in years, and so you might want more runway because your progress is way slower than that of a YC-backed Internet monopoly wannabe.
By the way, MIPS Technologies was killed by genius investors who said "give us your $100+ million in cash or invest it" and a genius CEO who said "fine, you ain't gettin' nothin', I'm buying Chip Idea." It turned out that they didn't know how to run Chip Idea and ran it into the ground, and now they had neither money in the bank nor anything to show for it. This drove the company value down so much that Imagination bought it for $60 million (the patents were sold to a big CPU cartel for another $500 million, perhaps unfortunately as genius investors did not get quite the punishment they needed to learn anything.)
A CEO capable of persuading the board of directors to keep the money in the bank would have done better.
If you're hemorrhaging money, they're going to be in control regardless of your actual burn rate. Even with years a runway if you're losing money month over month and your runway only gets you 90% to profitability, it doesn't matter if that 90% happens in 2 months or 2 years, it's still going to happen without cash or a change at the company.
> it doesn't matter if that 90% happens in 2 months or 2 years.
It does. If you must sell your house this week you'll get a lower price than if you can afford to wait for a year for the most eager buyer who's in love with the place. The effect is more pronounced with selling stock in a private company which is much, much harder to price than a house.
> it's still going to happen without cash or a change at the company.
It depends on why you lose money. If you lose money because you acquire many users and lose money on every user, you need to "change" the company in the sense of finding a way to make money on every user, enough to cover your more or less fixed expenses and then some. If you lose money because you're building a product and haven't reached mass production either because it takes a lot of time to ramp up production or because it takes time for demand to show up, say for regulatory reasons, then the "change" is simply getting to mass production. In the latter case, having more money is (in a way) getting you closer to that welcome "change" than in the former.
Agree, I saw a startup where I worked go down because of too much money.
They had a very good seed round and raised $2M. They used this to develop their first product, which did really well. After 2 years we had 50 employees and were breaking even, sometimes even a bit profitable, so we had even some extra in the bank. Obviously such numbers drove investors crazy, and they went to the highest amount they could raise without selling most of the company. So they raised about $20M.
After a few months our product (and our income) started to dwindle (competitors were upping up their game, different platforms became relevant,...), but the founders were very chill about it - I guess because we had enough cash in the bank to run the business for years without firing anyone.
But after a year of so the investors started to panic - no wonder since our revenue numbers were in freefall. After another year or so the founders were forced to sell the company for small change compared to what it was valued at its peak.
This is the part I don't understand and am going through now. You raise a ton and get good at spending or you raise minimum and constantly bridge every time growth doesn't match plan, buying time to catch up or tweak.
Why don't investors offer terms that have steps with growth KPIs (ones you can't spend your way to) that give you more money automatically if you make the metrics? As a company you don't have to constantly raise or bridge but you also can't go drop 5M on new offices. You have all the money and runaway you need as long as you hit the milestones. The investors still have all the same upside but less exposure.
I must be missing something I guess. It would solve issue we have at the startup I'm at now though.
Indeed a class of investors does exactly this - they provide unlimited but conditional money, set strict KPIs, embed their own people to steer the efforts in the desired direction, and generally take a hands-on role until they exit in 3-5 years. This investor class is "Private Equity" guys and girls, and they are 10-50 times larger than most VCs we talk about (on headcount, funds raised, investment sizes, reach etc).
I think it might be a matter of scale: VCs are tiny and they don't have the resources to take such an active role. Even the crazy successful legends like Accel/Sequoia/Benchmark/A16Z/USV/etc employ fewer people than an average company they invest into ~every month.
Maybe one thing lead to another. By making your customers and employees happy, you make your investors happy.
The money makes sense when you need to scale fast. Specially in the development stage, when you don't make a dime yet.
With the advance of the internet marketing, it's don't make much sense, as you put.
Investors should be moving their money from internet, i think, to AI, Space, Augmented reality and so on. They should fund stuff that is really risky. Turns up ... internet is not risky anymore.
This is a myth. I've just parted ways with a second company in a row that had to discover for themselves that 'internet marketing' wouldn't magically solve their top-of-the-funnel problem.
Unless you are independently wealthy or building something that can truly be bootstrapped (no expensive R&D, for example), investors are a necessary constant.
I honestly think one of the reasons the company I worked for was successful was our inability to raise money while we were young, which forced a real discipline and creativity for how to do more with less. It also made us skeptical of investors and ensured we didn't base our internal feelings about the company based on what a bunch of incredibly fickle investors thought. This was important both when investors hated us, and perhaps more important when they switched and loved us.
And to the second point, I saw first hand how easy money made one of our competitors so cocky they had no chance of success, and another one got too much money and got distracted spending it all to actually make a core business that made sense.
Money is necessary and important, but having too much of it is also a risk that you need to take seriously.