Feasting to Death

A wise friend once told us that more start-ups die from overeating than from famine. Having lived the past few years in the trenches of fund-raising, we can attest to the truth of those words.

Start-ups have to constantly walk the fine line between raising too much money (and the dilution that entails) and raising too little and running out of funds. More importantly, the biggest advantage start-ups have is speed. A twenty person company can always move faster than one with 200 people, let alone one with 20,000. All of this conditions start-up CEOs to spend now. This leads to the stereotypical start-up running out of time down the road.

But the reality is a bit different, and CEOs need to think hard during the good times to avoid those bad times. All too often, a small company raises a pile of money, and then races to spend it. This is what they are supposed to do. The problem is they need to be very careful what they spend that money on. This is far more important than worrying about the next round. Start-up CEOs should always be raising money, better to focus on where the money is going. Companies, especially the CEO, should be most anxious when the bank account is full.

Here is the problem. When the company has a full bank account, the temptation is to do everything at once. In fairness, this can seem sensible. Prior to the fundraise, everything was stretched, and there are so many things to fix. But the reality is money loosens discipline and focus. After speed, focus is probably a small company’s biggest advantage against its massive competitors.

This is especially true for “visionary” CEOs who have grand ambitions to shake up the world. Vision is great. Vision can get a company through the hard times. But with lots of money in their wallets, the temptation to do too much can be overwhelming.

All too often, the outcome is bleak. After a flurry of hiring and spending, amidst loose discipline, every project ends up being half completed. Technical debt actually goes up, because engineers are constantly being re-purporsed to new tasks. Early pilot projects get lost as the company’s focus moves on to larger customers or newer products. Chasing every dream is a sure fire way to achieve none of them.

Instead companies need to buckle down and make hard choices. You are not in a candy store, you are in a dark maze with immense challenges ahead. And you are spending other people’s money to get out. If they do not see results, they will leave you in the dark, alone and cold. No matter how much they sing your praises when they are signing their checks. It is amazing how quickly someone can spend $25 million.

The hard part is that so much of the work needed does not look like work. As companies grow from 2 or ten people, to 50 or 100, they need more support. The product needs to be pared down, the org chart does not. Simply hiring only engineers does not work. The company needs structure, process and support. Start-up CEOs who have lived through the hard times worry that this is unnecessary spending, that these people will just leach the company’s progress. But understaffing support can end up draining the team even more. Does your company spend cycles tracking down shared passwords? Who is responsible for adding and deleting people from cloud services? Do you really need an accountant? Are performance reviews really necessary? It is tempting to say no to all of those, but the lack of appropriate support ends up draining the company through wasted time and frustrated employees. Most important, how many products does your start-up have? If the answer is greater than 1, something is wrong.

All too often, it is not the support function and another layer of management that causes a drain, it is instead the CEO launching new ideas, under-estimating (by orders of magnitude) the amount of time it takes to add a tiny feature, by shooting for the biggest customers (who will take three funding rounds to make a purchase decision). Vision is great, but execution and discipline are what deliver results.

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