Quick reads

When you need to drive somewhere, you for sure want to have enough gasoline in your tank to be able to reach the next gas station. Capital is the same fuel and lifeblood for every startup company. You’d better have a little bit more than you need to reach the next milestone instead of standing on the roadside with an empty tank. “Ran Out of Cash” is the second most popular reason why startups fail. Having said that, some entrepreneurs try to raise as much as they can. But what if a startup has too much money? Some of you may become very intrigued: Is it even possible for a company to raise too much capital? The answer in fact is not that unambiguous.

Raising capital is an engrossing process that occupies significant amount of entrepreneur’s time and efforts drawing away his attention from day-to-day business operations, spending time improving their product and gathering customer feedback from the people who use it. Thus, it is better to have enough capital in order to continue operating for another year or more and to finance unpredicted situations that always happen on the way.

Nevertheless, raised round of investment is not the ultimate success yet. It is only an intermediate milestone on your way to building a sustainable business. However, raising too much capital might even hurt your venture instead of helping it in case you are not really ready for it. According to a survey analyzed 3,200 startups, 70% of startups fail because of premature scaling, which makes it #1 cause of startup death. Having too much money to spend often leads to an entrepreneur losing his focus and starting putting money into any side idea that looks like it may worth something. As a result, entrepreneurs burn their cash without having a sustainable business model in place or pursuing risky strategies that they would have been avoiding otherwise.

Another appearing hurdle is a potential down round. Bob Dorf, serial entrepreneur, co-author of “The Startup Owner’s Manual”, wrote a post in which he cites statistics that only between .2% and 2% “venture backed startups will ever achieve $100-million or more in valuation”. High investment round raises the high bar for future rounds. As a result, the down round usually means an urgent need in operating capital, the fact that entrepreneurs did not meet their original projections, and a high risk of going out of business in case of not raising the next round.

Last but not least, is relation of amount of raised funding to the motivation and creativity of team members. People usually are more efficient and focused on what really matters while having limited resources, because no one truly wishes for hard times. Mark Suster, entrepreneur, angel investor and investment partner at Upfront Ventures, talks about it as “holding one’s feet to the fire”. He considers that it forces entrepreneurs to make harder decisions, negotiate harder on different contracts, and be more efficient in progressing forward, while having too much capital on a bank account allows entrepreneurs to be more relaxed.

Image Source: https://www.entrepreneur.com/article/275659

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