Why Too Much Venture Capital Can Be a Problem
While venture capital is an essential part of the engine that drives capitalism., having too much cash can cause issues.
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The warnings have been starting to get dire for a while. Last September Marc Andreessen, one of the most influential investors in tech, predicted that unless young companies start to get their spending under control, they risk being "vaporized" by a market turn.
And while he's certainly not alone in his concerns, this March ecommerce darling Etsy announced it was going to file for a $300 million IPO, despite posting a $15 million loss last year. And is definitely not an anomaly, when talking about over valuing companies and raising too much capital.
Taken together, one has to wonder whether the path big tech is on is sustainable in the long term, especially when one of the industry's most enthusiastic evangelists sees smoke.
In all likelihood, the answer to that question is a lot more complicated than either a tough-love VC or a high-flying IPO make it seem. On one hand, companies like Amazon and Facebook have demonstrated that pursuing growth over profit is a viable business strategy. On the flip side, we still remember 1999, when BMW signing bonuses and other dubious expenditures augured bad times.
Related: 4 Steps to Help You Prepare for the Fundraising Process
In my own experience however, there is a middle ground. At my own company JOOR, a wholesale marketplace, we raised money to help us grow, but we also tried not to touch it. Besides a low-burn rate, this ended up having many benefits:
Provides an emergency fund
Once your burn rate gets high, it's very likely going to stay high. Employees don't like pay cuts -- even slight hits can have a spiral effect on productivity. If you don't have enough money in the bank to cover salaries for the rest of the year, people will start to look for other work. A substantial emergency fund sends the message to your employees that they're there for the long haul, something they need to know so they can focus on their jobs.
Can identify strengths and necessities
When I first launched JOOR, I decided to bootstrap for a year. This was hard to do, particularly since I needed to hire engineers right away to build out the software. However there was another big benefit to this approach that I didn't anticipate: It let me prove to myself and investors this business could work. Large sums of money burn a hole in your pocket. It can also let you get away with cutting corners and pursuing hires you're not ready for yet. Without venture capital, you're forced to identify necessities and come up with creative solutions. If you can't throw money at the problem, then you won't.
Related: 8 Questions That Will Help Set the Right Expectations With Investors
Helps send the right message
Swanky offices are increasingly a norm in tech. And it's often easy to see the value of this investment, as most people need a professional space to work in, and in many cases there won't be an existing building that suits your needs. But you don't have to have a Ping-Pong table or a keg refrigerator. Shopping is fun, but I believe it's much better to invest in good people rather than good amenities.
Digging deeper, these profligacies can also send the wrong message to people who you want to take you seriously. You're not doing everything you can to fix the business model if you've got an amazing headquarters but no revenue.
Venture capital is an essential part of the engine that drives capitalism. It's hard to see how breakthroughs like 3-D printing, and now space travel, could be funded without it. However it's also hard to see the logic of using that money on frivolities. A rising tide lifts all boats, even the ones without a life raft.