Even the founders who successfully raise venture capital struggle to do the right thing with it.
I recently had a conversation with a founder who just raised a little over a million dollars. And while his startup is growing fast, his small team is still trying to do everything themselves.
“I’ve figured out a really great process for getting users,” the founder explained as he got comfortable in the chair across from my desk. “Now I just need to crank up my volume.”
“Why are you planning to scale volume by yourself?” I asked. “Why don’t you hire other people?”
“We don’t need to hire anyone else,” the founder explained. “We can do everything ourselves. By staying lean and doing everything on our own, the money we have in our bank account right now will keep us running for years.”
“But didn’t you just raise capital?” I asked him.
“Yes,” he answered, “but that’s the money we need to survive. We want to spend it slowly to keep our runway as long as possible.”
In his response, I couldn’t help but hear myself from back when I’d raised my first funding round. I’d been the same, 20-something founder who didn’t understand the real reason to fundraise.
“The first time I successfully raised money from investors, I couldn’t stop staring at my bank account,” I told him. “It was only $750,000 (a relatively small amount in terms of startup funding), but, since I didn’t grow up with lots of money, I felt rich. I’d sometimes even login to my company’s online banking in order to bask in the feeling of having so many digits in an account balance. I once even printed a balance receipt from an ATM just so I could have a physical copy.”
I went on to explain that my obsession with having lots of money in our company’s checking account also made spending money difficult. Simply put, I hated seeing my balance decrease. Because of my reluctance to spend money, even after raising capital I continued operating my company like a lean, scrappy startup with no resources. We kept our burn rate as low as possible, avoided hiring people, and did lots of…