The dangers of raising too much money

Last week Marc Andreessen fired off one of his now famous Tweetstorms about the problems that having too high a cash burn can bring. These are the money tweets (if that’s a thing..):

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Marc was talking about large companies with huge burn rates, but they also apply at the earlier stages. I regularly get asked about the dangers of raising too much money, and these tweets nail it. Investors will only invest a lot of money if they’ve been sold a plan that needs it. Hence once the money is raised the burn will go up, and if that’s premature then the problems above ensue.

Mark Suster recently wrote a good post on this subject. His advice to startups is to raise at the upper end of normal. That’s good advice.

 

  • http://www.troglo.net Henning Moe

    Thanks for sharing – didn’t catch this on twitter. Said in a different way: If you raise too much and continue to raise too much, you are building a culture that is not bound by the need for a positive EBITDA to drive shareholder value. Topline growth becomes the only goal. This is very dangerous, unless you are untouchable, i.e. Facebook. I thought we learned from Groupon… I guess not?

  • neil_lewis

    Thanks Nic – could this post be renamed ‘the dangers of hiring people’? ie. too much cash encourages the hiring to take place too fast and teams are too brittle?

    ie. solving the problem is to tackle the hiring and leadership of people issues?

    So, only grow as fast as you can effectively assimilate each person – outsource the rest? Isn’t that what Forward Partners kind of offers anyway – at the early stage at least?

  • http://www.theequitykicker.com brisbourne

    Not quite. Hiring people fast when you have growth engine working is often the best thing to do. It comes with its challenges, to be sure, but if the business is enjoying genuine growth then maintaining flexibility can be less important than seizing the opportunity.

  • http://about.me/buckman Andrew Buckman

    As long as you’re hiring fast to take opportunities and not throwing bodies at problems.I think the third point hits it – too many managers don’t take time to think through the underlying issue to assess if the hire is really necessary as they are used to having plenty of resources. Bootstrapped or turnaround situations are great places to learn how to use the resources you’ve got.