Raising millions of dollars from VCs is still the tech entrepreneurs’ dream.
Entrepreneurs believe that a hoard of cash in the bank will give them the luxury of developing better products, marketing the heck out of them, and reaping the rewards with big sales and an eventual IPO. But more often than not, the money is a curse. When a company is running on a tight budget, it will usually perform far better than a company that is well capitalized. In my experience, having too much money always leads to bad habits.
First, the CEO will feel pressure from investors to upgrade the management team and bring in “grown up” supervision. This doesn’t always work out as planned. Seasoned managers want bigger salaries and larger chunks of equity. VCs usually expect a portfolio company to use a preferred headhunter to find the rockstar VP of sales. Naturally, the headhunter also wants an equity stake, on top of a finder’s fee in the neighborhood of six figures.
When the rockstar manager arrives, often coming from a big company, he/she may expect rockstar perks—a secretary, first-class travel, a limo to the airport, etc. These factors can serve to disrupt what must be the core focus of any startup—pulling in revenues as quickly as possible to forestall death. When employees see their bosses spending freely, they too stop worrying about keeping costs down and don’t care as much if a sales cycle stretched out longer. This attitude can kill a company.
Second, outside money usually brings expectations of very rapid growth and a de-emphasis on profitability. VCs wants a home run, not a single or a double. And they want the home run within five years or less. Founders, not VCs, know the proper pace of growth for a company. And a founder is far more likely to drive a company toward profitability if he’s is about to lose his life’s savings. A founder in this position turns every person in the company into a salesperson, and that’s the best model for a scrappy startup. In the end, this creates a company DNA emphasizing profitability above all else. That’s critical for success.
This happened in both of my startups. When my company accepted outside money, I immediately saw in board meetings and in company decisions that the focus was on growing revenues quickly but not necessarily sustainably. It was harder to maintain customer relationships built on trust when we also faced expectations to sell as much product as possible as quickly as possible, regardless of customer needs. Yes, sales guys should be hungry. But they should also have a long-term view on customer relationships and focus on profits rather than on top-line growth.
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