People used to say you couldn’t be too thin or too rich, and I think we know now that both points are sometimes wrong. Too thin isn’t my problem, so let that one go; but too rich is a problem for some startups. Not when too rich refers to your own money, perhaps, but with startups it’s almost always investor money that creates a problem–meaning: not your money, but their money.
Taking their investment is your promise to deliver. And the more investment you take in, the more return you’re promising to deliver. So if you got more money in than you can spend productively, you’re in trouble.
I once heard a person suggest that he wanted more investment than his plan said he needed for “peace of mind.” Bad idea. You won’t get peace of mind by having somebody else’s money in your bank account gathering the implied promise of delivering something.
What you get sometimes is people wasting money on bad marketing spends because they can’t find good spends, and they have to spend the money before they face the investors. This explains a lot of very unproductive Super Bowl ads during the dot-com madness.
I picked up on that over the weekend reading Roger Ehrenberg’s “Monitor 110: a Post Mortem” on his Information Arbitrage blog.
We rarely get a chance to look backward as well or as openly as Ehrenberg does in this post. Calling his involvement with Monitor 110 “one of the most interesting and informative experiences of my life,” he offers us a view into the heart of it, well organized into a simple list of seven points:
- The lack of a single, “the buck stops here” leader until too late in the game
- No separation between the technology organization and the product organization
- Too much PR, too early
- Too much money
- Not close enough to the customer
- Slow to adapt to market reality
- Disagreement on strategy both within the company and with the board
Those are good points, and the post expands on them well. It was “too much money” that caught my eye first because I’ve seen that problem in the past, but I think it’s not one a lot of people think of. Roger adds:
Too much money is like too much time; work expands to fill the time allotted, and ways to spend money multiply when abundant financial resources are available. By being simply too good at raising money, it enabled us to perpetuate poor organizational structure and suboptimal strategic decisions.
I also liked the reference to too much PR too early. I see that happening, too, and he puts it into a very understandable, concrete context:
[some] bad behaviors were reinforced by an unplanned event that sharply impacted our psyche: being on the front page of the Financial Times. It is hard to call it a mistake since we didn’t seek to get such exposure, but I put it down as Mistake #3. To be honest, this single fact was a very meaningful factor in our failure. It raised the level of expectations so high that it made us reluctant to release anything that wasn’t earth-shattering.
Both of these points are reminders that the hunt for financing is not just a simple quest for money. It’s about finding good partners, the right partners, and building long-term relationships and healthy businesses.
Information Arbitrage: Monitor110: A Post Mortem
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
