The Problem With Having Too Much Money
Venture capital is the life blood of almost all startups, but being too well-funded can be almost as dangerous as being short of cash.
While I usually like to name the companies that I have been researching, for this article, I’m anonymizing my comments.
Recently, I have been researching several companies in the same climate tech field. One—the younger of the two by several years—is based in the U.S. and the other is based overseas. The U.S.-based company has a charismatic CEO who was a co-founder of another climate tech startup back in the day and who has great connections in the U.S. VC and corporate VC world. He has even given a TED Talk.
The overseas company is led by its low-key technical expert founder with no prior startup experience but 15 years of increasing professional responsibilities in a technical discipline.
The two companies manufacture products whose technical specifications are nearly identical. My research leads me to believe that the overseas company’s product is technically superior, but the race is pretty close on paper.
Here is the kicker: The U.S.-based company has raised five times the amount of its overseas competitor—a total nine-figures of capital injected over several funding rounds.
Because of this additional funding, the U.S. company has announced high-profile projects in many different locations worldwide. The customer and partner logos on its pitch deck look like a Who’s Who of the Forbes Global 2000 list.
Its competitor, on the other hand, has been constrained in its marketing efforts, so has focused on customers in its domestic market and kept costs low by running sequential pilots before embarking a few years ago on its first high-profile commercial project.
One of the big biases in the VC world is that the speed at which a startup scales up is thought to be a proxy for its ultimate success. So a young startup that has raised nine figures early on, announced a lot of flashy partnerships and projects, and has a photogenic TED Talker at its helm looks like it will be a lot more successful than an older startup led by a technical guy that has raised less money and announced fewer projects more methodically.
But, just as it’s not a good idea to judge a book by its cover, it’s dangerous to judge a startup based on announced deals and money raised.
The U.S. company got over its skis and overpromised on its technical capabilities. As engineering work started on the projects, it became obvious that a lot more work would have to be done to get the systems integrated with customer facilities—and a lot more work means a lot higher cost. To make matters worse, several of its marquee projects were funded through U.S. government grants and those projects were cut off almost immediately after the Trump administration came into office.
The foreign startup worked more methodically with its prospective clients and made sure they could under-promise and over-deliver. They also made sure that the systems they designed made good economic sense even without subsidies.
This is not to say that everything went smoothly with the foreign startup. Anyone working on a first-of-a-kind, FOAK, project runs into issues—infrastructure improvements need to be made, permit frameworks don’t cover the new technology so the company needed to apply for exceptions, et cetera. But two years after its last modest fundraise, the company says its financial position is still strong and that the revenues from the commercial project help attenuate its cash burn.
It may sound counterintuitive to founders worrying about where the next payroll check is coming from but figuring out how to work within constraints helps most startups more than it harms them. When a startup’s bank account is sloshing with easy money, founders get antsy to spend it. Headcount balloons and impossible promises are made to clients. Sooner or later, the bug of fantasy splats against the windscreen of reality.
The morale of the story: sometimes having too much capital can be as dangerous to a startup as having too little. If you have the funds to design a product or service that meets and exceeds the expectations of customers that are willing and able to pay for them, you have enough capital. Intelligent investors take note.