Raise capital with a purpose

Eric Paley wrote a great post on TechCrunch (Wasting time with the Joneses) over the weekend about the temptation for startups to raise as much money as their competitors just for the sake of raising money. Eric explains in much better detail than I possibly could that this is a terrible idea.

One symptom of this disease (brought on by too much capital in the market) is that the traditional “Use of Funds” slide in a founder’s pitch has fallen by the wayside. Most pitches I see these days approach use of funds as a total afterthought. If they include the slide at all, its something like 70% for hiring, 20% for marketing and 10% for cushion, full stop.

Seeing so little thought go into how the company might use the money they’re raising is a huge red flag. If you don’t really know how to use the money but you’ve raised a boatload, you will be under pressure to spend it and if you are under pressure to spend it without a plan, you are going to spend it poorly. In these cases you will often see founders spending the money on a hiring binge. Hiring is the easy/lazy solution to a problem. If you can’t think of a nuanced solution, just brute force it with more people.

I think founders are afraid of putting their real needs/projections to paper. They worry that they won’t know exactly how to spend the money or that we might pick apart their strategy. As Field Marshall Helmuth Von Moltke once said, “no plan of operations extends with any certainty beyond first contact with the main hostile force.” I don’t expect founders to actually spend the funds exactly as they had planned. Stuff happens and founders need to be dynamic, they need to adapt on the fly. The point is, I want to know that the founders have put thought into what they are doing and aren’t just raising capital out of fear.

Final thought, don’t raise money unless you need it and if you do need it, make sure you understand why.