Having too much money can be a curse, not a blessing

Trust me, I love having well capitalized companies.  However, having too much money can be a curse, not a blessing.  More often than not, I see management lose financial discipline and avoid making hard decisions when capital is abundant and not scarce.  To many executives, money does solve all problems.  And yes, having money allows an entrepreneur to do many things with his business like hire more talent, scale the back-end infrastructure, and ramp up sales and marketing.  On the other hand, when an entrepreneur has too much money, the tendency is to throw more money to fix a problem.  Sales are not ramping up quickly enough so let's hire more sales people.  Marketing is not generating enough leads so let's spend more money on lead generation.  Engineering keeps missing its product release date so let's hire more engineers.  And what happens is that more money gets poured in and that only exacerbates the problem as management never really spends the time to dig deep to understand what the underlying issue is and to fix it at the source rather than layer on more resources.  In other words, an entrepreneur only hastens his downward spiral by spending more money on an inefficient business strategy. 

On the flip side, I have seen many an entrepreneur create successful businesses who some could argue were slightly cash-starved.  I am not arguing for entrepreneurs to starve their companies of the resources they need, but what I am suggesting is that having too much money can make one lose their creativity in terms of allocating scarce resources to grow a business.  This is especially quite important during the early stages of company development.  An entrepreneur needs to experiment with various ways to reach his target market, generate revenue, and develop product.  An entrepreneur also needs to stay focused, disciplined, and make hard decisions in terms of where to focus company resources.  Too much capital can kill this need.  Throwing too much money at the wrong strategy or too many different areas only adds fuel to the fire.  While money can really help an entrepreneur scale a business, having too much can be a curse.

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This post was written by who has written 358 posts on BeyondVC.

9 Responses to “Having too much money can be a curse, not a blessing”

  1. Shivering Timbers Mar 1, 2006 at 5:35 pm #

    This is absolutely true.

    When I was a research analyst during the dot-com bubble, I noticed that many of the best-capitalized startups were flaming out spectacularly (think Webvan). So we did a little research project in our department, and combed through our venture database to try to find any instances of startups which raised over $100M in a single round and earned a positive return for the last stage of venture investors (“positive return” being defined as an acquisition above the postmoney valuation at the last round, or an IPO which remained above water for the last VC investors 180 days post-IPO when the lockup expires).

    We could not find a single instance.

    A few weeks after doing this research, I happened to mention it at lunch at a conference I was attending. Naturally, someone else at the table overheard and said “Well, my company just closed a $100M round.”

    That was 6-7 years ago. The company my lunch companion worked for has not yet had a liquidity event.

  2. Dharmesh Shah Mar 1, 2006 at 10:09 pm #

    I agree totally.

    In addition to cloaking the real issue, its also important to remember that capital has a *cost*. So, if you have raised capital (the most common reason for having too much money — unless its your own money), then the capital itself has a cost to it. So as an entrepreneur, you not only have to overcome your normal expenses, but in a sense, also have to overcome your cost of capital to truly be “making money”.

  3. Matt Mar 2, 2006 at 2:15 am #

    And of course with all that excess cash comes pressure to generate excess returns, despite the fact that returns to capital seldom scale along with the size of the infusion, even for managers with theoretically perfect spending discipline.

  4. Charlie Crystle Mar 5, 2006 at 4:03 pm #

    I wouldn’t mind having a lot more money to work with. If you’re in a competitive market, resources don’t make you comfortable, they make you stronger. I’d rather have a hammer to go after our market than the piecemeal investment, no question. We’re winning either way, and maybe we’ve developed efficiencies because of the funds, but really, give me the damn hammer and let me get to work. So to speak.

  5. Hooman Radfar Mar 7, 2006 at 12:01 am #

    Ed, I agree that in some cases having too much capital can actual become a problem. A great deal of the impetus to innovate within our company came from the fact that we did not have millions of dollars to start. We were forced to really make some hard decisions – fast. That being said, however, I think that it is incumbent upon entrepreneurs and their investment partners to effectively balance the benefits of staying lean with their need for “a hammer” to go after a market. If you are stingy at the wrong times, you could be toast.

  6. John Ireland Oct 23, 2008 at 2:42 pm #

    80% of Inc’s 500 fastest growing firms started up with a credit card – or less. Most, however, are in industrial services where fixed or sunk costs are few.

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