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How funding can kill your startup

January 28, 2009

Too Much Money
Often one of the first things that comes to mind when you’re thinking of doing a start-up is funding. How can we get some cash to burn. Pitches I see ask for millions of dollars and some people will tell you: “Get all the funding you can get, even if you don’t need it”. There are plenty of reasons why getting too much funding can be a bad thing however. Too much money can make you less “hungry”, less creative, less motivated.

There is another part to this that is often overlooked: Money raised is money that has to made again, and again, and again, and again, and again, and again, and again, and again, and again, and again. Investors expect a 10x return on their investments, so for your startup to be a success it needs to generate a multiple of the investment. In fact, if you take a $5 million investment and give up 40% equity, that gives your company a valuation of $12.5 million. So if 10x is success you need to exit for at least $125 million (25x the investment). Anything less is failure.

A bootstrapped company on the other hand is a success as soon as it turns over enough to pay the bills and a decent salary. If 2 founders sell their company after 3 years for a few million, you can hardly call it failure. It might not be the $22 billion they had in mind, but I’m sure they’ll enjoy driving their new Porsche up to the Hunter.

So while getting more funding might help you succeed, it also raises the bar of success and could kill your startup.

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From → Rubbish, Startup Tips

2 Comments
  1. Speaking of the Porsche, Ben Keighran from BluePulse, and awesome dude and real success story to come out of Australia in recent times has done very well out of the BluePulse business, even though it was funded.

    A decent word of warning none the less.

  2. Brian Menzies permalink

    Yup, too much money can make you lazy, but too little and you’re dead. My favorite businesses are the bootstrapped, self funded ones, but sometimes it’s really hard to bootstrap a silicon chip fab or a new drug or a high throughput optical switch. Then you need money and better raise what you need or you’ll get hammered when you go back cap in hand. Funded vs unfunded you can make it your first criteria if you want but it is going to limit what you can do.

    I like Jeff Hawkins’ (palm inventor) advice, “focus on what you want to achieve then always make decisions that increase your probability of achieving it”

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