There is no denying the funding market is hot right now, but that does not mean you, as a founder, should take as much money from investors as you can.colour, one of the most notable startups recently, famous for raising $41 million even before launching their photo sharing app, just announced they lost another key employee, DJ Patil. This comes on the heels of former President and co-founder Peter Pham leaving. colour is now red faced and odds are they will go down in history as a cautionary tale to startup founders rather than an innovative and inspiring story.
Apologies to anyone associated with colour, but here is the unabated truth:
The colour story proves taking more money than you should is – outside the health of bank account – very harmful to your young startup. There are perspectives supporting raising money before the nuclear winter hits, and I am not arguing on that one. I am arguing against massive fundraising, any funding above and beyond what is necessary to get to your first major milestone with positive growth and momentum. Why is raising too much money a problem?
A How Not To
The colour story is a HOW NOT TO launch your company. I don’t care if these guys are startup veterans with successful exits under their belt, those experiences are not important when you are just launching a product. Super Bowl expectations on a very early product release is not the optimal position for a young startup. The reason is because the dynamics are now all wrong, with little upside and way too much opportunity to under-deliver. Too much focus is on company funding, value and status, not product, usage and experience.
The most important thing for an early startup is building an attractive yet simple product that will gain initial traction without all the hoopla. That is it. (examples: Airbnb, Instagram, Tumblr, etc…) Seeing market traction with no money or mass exposure is how you know you have something of quality on your hands.
I fault the investment community on this one. Why? Well, as a founder wouldn’t you take $41m if it was waved in front of your face? The investors should have known better. This type of behaviour is exactly what I was talking about in “Did we Just Become The United States of Idiocracy?” I will officially place the blame on Sequoia Capital, Bain Capital, and Silicon Valley Bank for shoving this much money in the face of a startup with an un-launched product. That is just fiscally irresponsible.
Too High of Expectations
Once you announce something that absurd – a massive funding pre-launch and a large post round value – all eyes are on you. You are the Rabbit and the bulls-eye is directly on your back. Although some branding and promotion is necessary to get the word out about your new product, this is not the type of news you want. Everyone is now looking at you with very sceptical eyes. Ironically, most other founders in the community actually want you to fail, since it seems quite unfair you were able to secure those types of funds.
And with all those eyes comes massive expectations – quality of product, useability, sociability, etc… all are as high as the amount of funding you just received. When one thing is wrong, the web will light up with criticism since such a big deal was made at the beginning. colour basically did the equivalent of Babe Ruth standing at home plate and pointing his bat at centre field announcing his home run. Except they swung and missed at all three pitches. OUT.
You Limit Your Options
When accepting that large of investment right off the bat, colour pretty much sealed their fate – a large exit is their only option. Rough maths will illustrate colour must exit north of $100 for anyone to experience a successful outcome. Unfortunately, not many do that each year and you wont find colour on the 2011 list. This is not good. This is not the best position to place a company just emerging out of the gates taking their first strides in the public. And pivoting from the original concept, although common, is viewed as instant failure. Search anything written recently and then ask yourself “is this an app that sounds like people are enjoying?”
It really is ironic, but launching and growing a company about natural, organic growth without involving much funding to start with. Momentum is your best friend. How are you supposed to gain momentum when you win the Super Bowl as a rookie?
I know the money is flowing like cheap wine right now but taking investment is a serious decision with fatal consequences you must weight cautiously. Don’t get caught with your pants down RED faced with embarrassment, everyone else will be laughing.
Read more posts on SoEntrepreneurial >>
Business Insider Emails & Alerts
Site highlights each day to your inbox.