Monday, October 12, 2009

Does Too Much Money Too Early Hurt Startups?

I attended a presentation at UVEF today by Skullcandy Founder & CEO Rick Alden.  By the way, Rick is being considered for the Entrepreneur of the Year award for 2009 by Entrepreneur Magazine.

Rick brought up a thought-provoking question that no one had an answer for, including himself.  We have all heard of the start-up companies that started in the Founder's basement and grew into wildly successful and profitable ventures.  But how many success stories have we heard of companies that start with millions of dollars in the bank and an "A" management team in place?

We can logically build out a sound reason why both situations foster success, but the underlying premise is that perhaps early-stage success has less to do with lots of capital and an impeccable management team.  Perhaps the struggle to scrape by and bootstrap at the beginning builds a discipline that makes the start-up more likely to succeed.  Maybe well-funded start-ups don't appreciate the struggle most encounter to raise capital and they spend it unwisely.  Or, we may find that having all the capital and the complete management team improves a ventures chances for success.


HERE IS SOME OF THE FEEDBACK I HAVE RECEIVED IN ADDITION TO ANY COMMENTS TO THIS BLOG POST:
@greggwitt: absolutely too much capital can hurt. saw it happen first hand.
Paul Herron: I like the analogy of an infant becoming a toddler, child, adolescent, and adult. You start with a newborn invention or idea and a founder's vision of how "success" will ultimately be achieved. Execution of a business plan in a nurturing environment may lead to tangible, measurable accomplishments, and each step toward maturity is rewarded with greater resources and more variables to manage. If milestones are met and feedback is positive, healthy growth takes place. Slow and steady progress is always preferred, but every industry has examples of erratic, unexpected successes and failures. Drug development, for example, is a very high-risk proposition, requiring close parental supervision all along the way (and perhaps just a bit of luck). Accordingly, many "infants" just don't survive.
John Kogan: The garage/basement, scratching month-to-month teaches you good habits and forces you to make tough decisions. This all leads to maximizing capital efficiency and your own inventiveness. When there are plenty of funds around you tend to substitute money for work and thought. It's not that you aren't putting in the hours, it's that you don't have to consider every decision quite as hard. Also, it's much easier to say "we'll hire someone" or "let's pay someone outside to do this" rather than hunkering down and doing it yourself - which is how you really learn when you are a young startup.
Could too much success hurt? Sure. But I think it would hurt for the same reasons as too much money, and primarily b/c it would bring a flush of funding and the sloppiness that follows. Of course that's just my two cents (and as a scrappy startup, we can't afford a penny more).
Larry Davis: I have worked with more than two dozen start-ups since 1999, and I find that the probability of success is driven more by the perceived tangible beneifts of the product in the eyes of potential customers as opposed to the amount of capital raised or the quality of the management team. If you are developing a product that offers measurable ROI or enhanced performance, you will generate revenue more easily than many others can offer. Then, it's a matter of controlling costs so that your venture is profitable.
To answer Ken's question directly, I would suggest paying attention to Ning. This is yet another social media company, but it is headed by internet legend Marc Andreesen, who has no trouble attractive investors and certainly has plenty of money of his own. Thus, Ning has plenty of capital and as "A" CEO as a company could have. Let's see how they do!
Mark Macleod: I think it's way better to start off without a lot of capital for many reasons:
- keeps you focused
- keeps intensity up
- keeps your ownership high
In the bubble days I was in a startup where we raised too much money. We got defocused and comfortable. Startups do best when they are lean and mean. So, I come down very strongly in favour of the lean approach.
Twitter is one example of a company with may more cash than it needs now. We'll see whether they execute and deliver on their billion $ promise.