When Startup Funding Can Destroy Your Business

When Startup Funding Can Destroy Your Business

Lessons from the ongoing pop of the venture capital bubble. 

David Powers

WeWork, Outdoor Voices, Lime — all VC-backed companies that are either crashing or seeing major changes to their Executive teams because they’re hemorrhaging money.

There’s nothing wrong with losing money in the first few years of your business, it’s actually pretty expected.

When you’re setting up shop, fighting a learning curve, and making large initial investments in the business, you’re practicing the gotta spend money to make money mantra in full force.

However, once you’re past launch, it’s clear when your unprofitability is signaling issues with your business model, especially for critical reasons that have to do with proof of viability.

I receive a lot of questions about seeking investment to accelerate the launch of a business. I can play devil’s advocate for both sides because honestly, seeking and not seeking investment are two routes that will be attractive to two different people. There’s no wrong answer. 

Whether taking the path of investment is right or not right for you is a personal question. 

Some of us have the leeway to launch a business without taking a salary for a while, while others of us don’t. You have to take personal circumstances into account while also being aware of the risks you’ll take on by accepting investment.

When you exchange time for money, you do so with some sacrifices. 

There are plenty of pieces out there that discuss why you should take investment for your business, but I’m going to discuss why I think you shouldn’t, and what’s a better alternative in place of it. 

Below are the major lessons you can learn from the ongoing pop of the VC bubble and why taking investment before proof of viability comes at a cost.

Get All The Cash, Skip The Work

This is what I believe a lot of fallen VC-backed businesses fell victim to — they received a ton of investment to back a business’ scalability without doing any of the work.

Even if they received investment after testing an initial proof of concept, a business that brings in a couple of grand isn’t the same as an 8 or 9-figure business. These business models function radically differently from each other.

They skipped all the nitty-gritty work of spending the time to build each pillar of their business, observing how each pillar worked (and didn’t work), and giving it the time and care to make adjustments.

This experience of fine-tuning and assessing is what gives entrepreneurs informed data to understand whether their business is capable of scaling. 

When you speed through this step, you guess an ending without seeing the plot.

Some businesses aren’t made to scale, but you often aren’t capable of realizing this until you put the business in play. 

You can theorize left and right with your investors that your business will scale, but all the financial projections in the world won’t substitute for pressing play and watching the plot unfold with unexpected plot twists and individual motivations.

Exchanging money for time to speed up the build-up for your business may sound like a worthy exchange so that you can get paid a full-time salary and buy all the team members you need to bring the business to life.

However, is that worth it if you’ll waste both time and money for an idea that wasn’t meant to be investment-worthy from the start?

Isn’t taking the time to explore the scalability of your business worth it if it means it’ll give you the knowledge to cut the business off the moment it’s no longer viable? Rather than in the aftermath of millions lost in investment money?

When you take on investment, you also remove the option of not scaling. 

There’s nothing wrong with having a business that isn’t meant to scale to 8 or 9-figures. Many of us are happy with running a business that we love and value without money and investment interest running the show.

Success isn’t concluded by the financial value of your company, it’s an internal, personal determination.

The question is really for you to answer — are you okay with taking on investment without the chance to decide whether scaling is right for your business or not? 

You Can Have Healthy Sales And Still Not Have A Viable Business

Even if your business is healthy and rolling in sales, it’s entirely possible that you can still have an unsustainable business on your hands.

Whether your cost per customer acquisition is too high or your attrition rate is insane, a business that costs too much to run can shut it down.

A business that’s expensive to run can either be predictable — high costs to create your product, expensive hires, etc. or not come to light until employees like the CEO or Executive team start making bad decisions.

Financial projections won’t catch human behavior, nor will it predict unforeseen screw-ups or bad investments. Projections only take your starting point into account and don’t adjust the numbers to poor product-market fit, lack of demand, or poor execution.

Are these scenarios you can accurately predict before the launch of your business? Not likely. 

Sometimes time is the only answer to discover all that you can’t currently see.

Hypothetical Realities

The terrible reality of taking on a large investment for a startup pre-launch is that you go all-in on one variation of a hypothetical reality coming true.

Some of us are okay with the odds, especially if we’re coming equipped with a ton of experience, industry knowledge, and are comfortable with risk.

Even for those of us who are confident, there are plenty of scenarios unrelated to experience that can equally destroy a company like poor co-founder and/or leadership dynamics, misalignment of vision, and more.

What To Do If This Isn’t Your Route

For those of us who aren’t okay with the risk, there’s thankfully an alternative route.

The alternative route requires bootstrapping everything from scratch and building things organically — doing the work every day to build an audience and generate sales consistently.

Creating a business that can stand on its own because it has a sales engine to drive it is the best investment an entrepreneur can make in their business.

When you build an empire with your own hands, you have the intimate knowledge to re-navigate it when an obstacle gets thrown your way and to answer big questions like whether scale is in the cards for you. 

This route takes time, hard work, and a lot of strategic know-how. It’s also a route of privilege — many entrepreneurs won’t be able to take this route because it requires time and patience for the many months the business may not bring in money. 

I love writing thoughtful, personal Friday morning emails called The Crux to help entrepreneurs turn their startup chase into a victory lap. Join here to get my best musings in your inbox.