How funding can kill your startup
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.