Many entrepreneurs believe that the lack of capital is their primary problem. If only they had a fat bank balance, they could kick butt. As a venture capitalist, I’ve seen what happens when companies raise substantial capital. It’s not pretty—in fact, my theory is that too much money is worse than too little. Here’s why.
1. Expenses expand to the level of funding.
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. We know we’ll meet our milestones, and our competition is a joke, so we’ll always be able to get more money.”
2. Money creates a false sense of security.
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 that any revenue that company counted on to extend the runway don’t materialize. 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.
3. Money makes companies hire “proven” people.
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, experience, expensive and lucky. These folks are accustomed to secretaries, first-class travel, and staying in the Four Seasons. You read it here first: proven people are over-rated. Oh, their resumes 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 organizations succeeded.
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Written by Guy Kawasaki on the American Express Open Forum
Editor’s Note: The Pictage Community Team not only loves to blog but loves to read what others are blogging about. A few of our favorite blogs and forums are Mashable.com, Alltop.com, and American Express Open Forums. When visiting these sites we come across articles that make us think of you, the photographer community, and we just can’t help but share them.
Guy Kawasaki is a founding partner and entrepreneur-in-residence at Garage Technology Ventures. He is also the co-founder of Alltop.com, an ‘online magazine rack’ of popular topics on the web. Previously, he was an Apple Fellow at Apple Computer, Inc. Guy is the author of nine books including Reality Check, The Art of the Start, Rules for Revolutionaries, How to Drive Your Competition Crazy, Selling the Dream, and The Macintosh Way. He has a BA from Stanford University and an MBA from UCLA as well as an honorary doctorate from Babson College.