I read a Guy Kawasaki blog post this week where he walked through six reasons why an abundance of capital can hurt an early stage business. In my entreprenurial law / funding law practice I work with a lot of business owners through capital strategies and the private equity processes. Honestly, the drafting of a private placement memorandum is the easy part of my practice. The hard part is creating the proper capital structure for the long term growth and success and reaching investors who want to invest in the business.
Here is one of the points from the post:
Expenses expand to the level of funding.
Funny how this works: companies create projections that use the money that they have. The availability of money makes them think of ways to spend it, so there’s less emphasis on doing the right things the right way. The logic becomes, “Our investors gave us this money to invest, not to collect interest in the bank. They want us to scale up and go for it, so we should spend it. We know we’ll meet our milestones, and our competition is a joke, so we’ll always be able to get more money.”
Here is one of the points from the post:
Expenses expand to the level of funding.
Funny how this works: companies create projections that use the money that they have. The availability of money makes them think of ways to spend it, so there’s less emphasis on doing the right things the right way. The logic becomes, “Our investors gave us this money to invest, not to collect interest in the bank. They want us to scale up and go for it, so we should spend it. We know we’ll meet our milestones, and our competition is a joke, so we’ll always be able to get more money.”
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