Capital Punishment: Can a startup have too much capital?

"Capital" punishment

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The headline reads, “X raises $10 million to reimagine Y”.

VC tweets, “Special team. Fortunate to partner with them.”

Founder tweets, “Humbled. Back to work.”

High-fives. Drumbeats. Tweets.

Capital can’t be a punishment, right?

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Capital helps. It solves problems. Some of them.

Capital hurts. It hides problems. Some of them.

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The issue is not capital.

The issue is excess capital.

Excess capital solves short-term problems.

Excess capital creates long-term problems.

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Let me explain.

All startups build products.

Good startups build products that customers buy.

Customers buy products that appeal to their true motivations.

The operative word is ‘true’.

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The road to hell, as they say, is paved with good intentions.

More capital brings expectations of faster growth.

Teams, with all the good intentions, throw money at the problem.

Coupons, discounts, and offers move the metrics.

Not the business.Wrong customers show up.

True motivations don’t surface.

The team conflates discount-seeking behavior with true motivations.

Ends up building the wrong things.

Excess capital is a punishment.

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Teams with less capital sometimes build compelling products.

When teams face existential risk, they can’t afford the luxury of doing non-essential stuff.

Extreme clarity emerges from this.

The focus shifts to the true motivations of the users.

Existential risk is too much of a risk.

But some jeopardy may not be a bad thing.

Jeopardy makes things happen.

Excess capital takes that jeopardy away.

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Every time a founder wants to raise excess capital, all this and more crosses my mind.

We understand a bit about capital, jeopardy, and user motivations.

We see more (than others) in these startups.

We try to pick the best ones.