“How much money should I raise?” is a question that startup founders often ask. Founders generally seek to raise as much money as possible, because they reason that it will give them more resources, a better chance of saying afloat and more time on their hands before they seek another round of funding. Founders generally love the feeling they get when they secure a major round of funding. It gets your name out there, more investors start calling you and your team gets re-energized by it. But it can be taken too far. The saying “Too much of a good thing is bad” also applies to investments. It’s easy to fall into the commonly held belief that as much as possible is the answer to the question “How much funds should I raise?” it may seem counter-intuitive, but raising “as much money as possible” can be more harmful than you realize. Here are some of the consequences of raising too much money too soon.
- You will spend it all in the same time frame: Whether you raise $50,000 or $50 million, you will incontrovertibly find ways to spend the money, because you erroneously believe that the money has to be spent. This could be done in several different ways – whether it’s hiring too much staff too soon or getting external contractors or on attending events. You will try to add features to your product or service even without the market research to support it. All of this comes at a price and they’re not one-time costs either, they require payment on a regular basis. After raising too much money, the funds may be available today, but 9 months to a year down the line, it won’t look so affordable anymore.
- You probably don’t need it: The fact that you will spend it all doesn’t imply that you need it. Having the money to rent office space in a posh area doesn’t make it the best thing to do right now. You might argue that you need higher paying clients anyway, and you need to be in their faces to get them as customers, but being able to sustain your company’s growth and scale upwards is important. Being an “overnight success” has its own pitfalls and several companies have fallen prey by getting too big too fast after raising too much money.
- It will make subsequent funding rounds more difficult to get: It may sound strange to you, but a company’s valuation is determined by just how much money it can raise – even more so in its earliest stages. Therefore, after raising too much money, your valuation will be higher and the next round of funding will be much harder to obtain. Investors will mostly part with less money – especially if the company has shown less growth or generated less revenue than you projected initially. Time may come when a second round of investment is necessary to keep your business afloat. If you need the money and find it difficult to get, you and your startup could be in for a rough patch.
- You will no longer be forced to think creatively: You may not like it, but constraints force you to be creative. Each person in the company has very short timeframes for making progress because you know proof-points are critical in fund raising. And importantly — having limited resources forces you to make hard, creative choices about what you will build and what you won’t. It forces us to make tougher decisions about who gets hired and who wont. It forces you to do things like keeping salaries reasonable especially when wage inflation has been the norm for years as opposed to overpaying after raising too much money. The two arguably most important measures for early-stage company capabilities are: The ability to hire extremely talented people relatively quickly and without overpaying and the ability to launch and move products early and often.