Overfunding Companies

The biggest problem facing the venture capital business these days is that we can’t seem to stop overfunding businesses. The prevailing sentiment seems to be if its a good deal, let’s put in as much money as we can. Well I think that’s crazy and I wish we’d stop doing this.

I’ve got an investment in a really solid company. The management is smart. They’ve built a business that has a bunch of happy customers and revenues are doubling every year. They’ve done all this on less than $3 million in total investment. They probably need to do one more round of financing before they’ve got the business to the point where it can finance itself with profits. We were thinking that we’d raise maybe $4 million just to be sure we had enough money.

Well along comes a competitor who knocks off our business plan. That’s allright with me. This is capitalism. May the best company win. But today I heard that this knockoff competitor is in the market raising $20 million. For what purpose, I’ve got no idea. Maybe they can’t figure out how to build a business with less than that. Or maybe the VCs just want to pour a lot of money into this “big winner” they’ve got on their hands. Who knows why they want to do this, but I think its crazy.

I sure hope our management team doesn’t get spooked by all this money their competitor is going to raise. Because my experience tells me that more money doesn’t usually translate into a better business. In fact, most of the time more money has translated into a worse business. Sure you need enough to do what matters, but too much money leads to all kinds of mistakes that I expect our competitor will end up making.

Less is more in my mind. I am in the return on investment business. It’s always easier to make a good return when you have less money at work. And I think if you look back at the way the venture business operated in 70s and 80s, you’ll see that most of the really huge successes were built on relatively small amounts of capital invested. I think we need to return to that model. But its going to be hard if this overfunding craze doesn’t stop.