Subscribe to Inc. magazine
STARTUP

Why Money Isn't Always Your Biggest Problem

If you think more cash will solve all of your startup's problems, you're in for a disappointment.
Advertisement

Lack of money is a convenient scapegoat for many startups, but is being low on cash really the biggest thing holding your company back? "Sometimes, money just hides the real problems," says Caroline Ceniza-Levine, co-founder of SixFigureStart, a New York City-based business-coaching firm. "If you don't know what those issues are, you're going to be throwing good money after bad. Money should be the last thing entrepreneurs worry about."

It's not hard to see why many entrepreneurs dive into the money hunt early in the game, especially when deal-hungry investors make it hard to resist. "Money is loose right now," says David Kalt, angel investor and CEO of Reverb.com, an online marketplace for new and vintage musical instruments that's based in Chicago. Twenty-six percent of venture capital deals in 2013 were seed funding--with dollar amounts increasing 22 percent from 2012 and 74 percent from 2011, according to the research firm CB Insights.

Bulking up too quickly, however, can steal time from actually building your business, says Rohit Arora, CEO of Biz2Credit, an online matchmaker between entrepreneurs and lenders. "Raising money is a full-time job," says Arora. "Not many people realize that."

Once you take money from angels and VCs, you may find your obligations overwhelming. "It's much easier to fail, learn, and adjust when you don't have investors," says venture capitalist Guy Turner of Hyde Park Venture Partners in Chicago. "You can move faster, and there are fewer people to explain things to."

Of course, there may come a point at which the only way to scale up is to raise some dough. At a minimum, don't expect an infusion of cash to make running the business any easier, especially if you're not ready to live under the microscope. Getting your operations in order before talking to VCs will also make them more receptive. "If your business is being run sloppily--and you don't have a handle on the staff you're managing or are not collecting your accounts receivable--outside investors will be reluctant to put money in," says Stephen Furnari, a New York City attorney who advises startups.

Successfully raising funding is a significant achievement for a startup, something you have every right to be proud of. Just don't lose sight of the fact that there is still plenty of hard work to be done. "Some entrepreneurs mistake feedback from investors and VCs as a substitute for getting out there and talking to real customers," says Hyde Park's Turner. "Just because a VC likes it, doesn't mean customers do." 

Much of the excess that led to the crash that ended the first dot-com bubble was the result of companies simply having too much funding. Here are four simple signs that you've raised too much money: 

1. Stadium rockers play your launch party. Pixelon's 1999 launch party featured performances by Kiss and the Who. It went bankrupt in 2000.

2. You go overboard on marketing swag. Kozmo.com is long gone, but a pair of the company's socks recently listed on eBay for $25.

3. Your chair budget exceeds annual revenue. Quokka supplied Aeron chairs to its 284 employees. When it went bankrupt in 2001, the chairs were auctioned.

4. You hire a celebrity spokesperson. Flooz.com paid $8 million for an ad campaign featuring Whoopi Goldberg. Remember Flooz?

 

 

IMAGE: Corbis
From the April 2014 issue of Inc. magazine




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Livestream events | Comments
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: