I have received a few e-mails asking how in the world can you raise too much money, as I talked about in the interview in the American Express OPEN article. This is a fair question, especially if you are a start up trying to pull together funding in today’s environment.
I actually do see some start-ups raise too much money, but not many. They are almost always backed by venture capitalists. VCs usually have a pretty high minimum investment, which can lead some entrepreneurs to “fit” their deals to fit this artificially high number.
But more often, I see successful companies raise too much money. Success can make attracting money much easier. Investors want to tag along on your success, and bankers love to lend to companies with rich cash flow.
Raising too much money can be much worse than not raising enough money.
I know those of you struggling to make payroll think I am nuts for
saying this, but it is true.
Too much money in a new venture leads to
poor decisions on unnecessary overhead, wasteful spending on
non-productive assets like opulent offices and furnishings, over
staffing, inflated salaries, and just plain mischief. If sales don’t build quickly enough the entrepreneur has a business a high level of overhead that just cannot be sustained.
Too much money put into a growing venture can lead to unsustainable growth and chasing too many opportunities too quickly. The influx of money is spent, but the now fast growing company has operating cash flow that just cannot keep pace with the expansion created by the infusion of money. It is like a rocket that runs out of fuel before it ever gets into orbit — it just comes crashing down to Earth.