Entrepreneurs are constantly lamenting how hard it is to raise money, so I try and be helpful and point out the metrics to raise a modest Series A (often higher now). In addition, I explain that there are challenges with raising too much money, especially when it’s done early. Raising money isn’t a success — it’s just an optional milestone along the road to building a meaningful business. Now, here are some challenges with raising too much money:
- Need to Pivot Again – Even when product/market fit has been achieved in one direction it doesn’t mean that’s the best direction. Entrepreneurs are constantly finding new opportunities and sometimes a pivot is required even after finding product/market fit because there’s another opportunity that’s better. Once significant capital has been raised, changing directions is much harder.
- Limited Exit Opportunities – More money raised equals fewer exit opportunities as there are so few exits above $100 million (see less than 2% of venture-backed companies sell for $100 million or more). Raising money, especially large sums of money, reduces optionality (see Startup Funding and Optionality).
- Down Round Potential – More money raises the bar for a future round at a higher valuation which increases the potential for a down round if growth expectations aren’t met or the market turns. Down rounds can be devastating to a startup (see Startups are Broken After a Down Round).
Raising too much much too earlier can be a challenge. Entrepreneurs should evaluate the pros and cons knowing that more money isn’t always the answer.
What else? What are some more challenges with raising too much money?