I wrote a post a few years ago about using your lack of funding to your competitive advantage. The basic gist was that all businesses act within constraints and that the discipline that can result from having less money that a competitor – if you embrace it – has the ability to sharpen your focus, avoid the temptations of distraction and be more thoughtful about how and when you spend the precious cash that you have.
I was reminded of that post recently when engaged in a debate about how much money a company should raise. The knee-jerk reaction is often “as much as they can!” And while that might sound satisfying, it’s often not the case. At Foundry we’ve been fortunate to be involved with a number of businesses that have taken advantage of the ability to raise a war-chest of cash. And when you’re going big, and have reached proof points where you can now spend money with a specific plan in mind (and the metrics to back it up) this often makes sense.
But not always.
Much less is talked about the null case. Those companies that could raise larger round but opt not to. We’ve had a number of those in the portfolio that are – by the nature of having not raised a eye popping round – much less talked about. While a whole lot less sexy and certainly not as buzz-worthy, NOT raising a large amount of capital very often makes as much (or more) sense than raising “as much as you can.” A few thoughts on why:
– For companies that are cash flow positive and already growing about as fast as they can keep up with (yes – there are plenty of these businesses around and yes – adding more cash doesn’t always equate to more growth) there’s often simply not a compelling need to over-raise. Think growing at the right cost vs. growing at all costs. One optimizes spend and trajectory. The other wastes money.
– Large rounds bring new investors and a different investor/board dynamic which can be a challenge to manage, especially for a fast growing business
– Importantly, those new investors and their large piles of cash bring with them lofty exit expectations. Often times companies are better served raising a smaller amount of money from existing investors to keep all of their options open – especially as they transition from start-up to mid-stage. I’ve watched this literally kill a company.
– Large balance sheets beget large spending (see my post I referenced above on being scrappier than your better funded competitor). The world is littered with companies that raised too much, then spent too much. And while you can certainly keep your discipline with a large balance sheet it’s pretty easy to get off track.
More than anything, its important to note that there’s a choice here. One isn’t better than the other – despite the market perception. Make your own choice and don’t get caught up in the hype.