More is better. Right? Nope. Sorry. More is not necessarily better. In fact more can be much worse. We’ve all seen it happen dozens of times before. Take a small hyped company and give them $50M and they’ll almost certainly blow it. Take a small team, ramp them up slowly, give them the right amount of money at the RIGHT time and they’ll be the next Delicious or Flickr.
In today’s market there’s plenty of competition among VCs and getting $10M shouldn’t be a problem for a decent startup. Don’t do it. Take less. Otherwise you’ll blow it. Even having the option of taking that much funding might hurt you.
Why? You’ll become soft. Lazy. Not hungry enough. You won’t care about your traffic because you’ll have plenty of time. You won’t be paranoid about your competitors because you’ve got money in the bank.
I’m going to go out on a limb here. I’m going to say that the net ROI for VC investment forms a bell curve or normal distribution.
Startups without enough money starve. Too much money and you become lazy and bloated. Just enough and you’re hungry enough to keep pushing forward yet still have money to pay for hardware.
The problem is that the VC market doesn’t want to hear this. Too much money. The smaller VCs would rather give you less money. If it were my company I’d rather take smarter (and less) money and keep pushing forward.
The next time you hear you’re competitor just raised a $20M fun just smile and keep building a killer product.
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January 15, 2006 at 6:19 pm
Kevin:
I agree with your point. See http://earlystagevc.typepad.com/earlystagevc/2006/01/back_in_septemb.html
for my latest post illustrating the point.
However, the empirical data on ROI is that it follows a power law distribution, not a Gaussian distribution. See http://earlystagevc.typepad.com/earlystagevc/2005/08/venture_capital.html
Best,
PR
January 15, 2006 at 6:42 pm
Looking at your second graph I think we might see the confusion. They’re two different ways of looking at the same data.
In my graph the Y-axis is ROI. the X-axis is amount invested. The sweet spot is going to be the *right* amount of funding at the right time.
Kevin
January 18, 2006 at 8:55 am
Small startups biggest fear when looking into funding should *definately* be getting overfunded. Not only does it make you fat/lazy, but it puts WAY more pressure on the team, especially the folks at the top — which in a smaller startup should be the ones really driving innovation. Having that much overhead to deal with can really kill the productivity and differenciation that put them in the place to get funding. The funding round is not the payoff, and folks need to stop looking at it as that. It should be the enabler towards the payoff.