Can Too Much Money Ruin a New Startup? (Yes)

Last week the new app Color launched, a service that lets you take pictures on your phone and share them with people in your immediate vicinity. Soon after the app debuted to mediocre reviews, it was discovered that the founders had managed to raise $41 million for their first, pre-launch round.

Let’s leave aside for the moment the discussion that begs, about bubbles and whether or not we’re in one now. Let’s talk about raising $41m before you’ve even launched your app.

That seems like a good idea, right? With that much money you could be sure to get to product/market fit, you could pivot as many times as necessary, you’d never be trying to get the product built with 70% of the development team you really need. You could also buy the domain name you want, instead of using some workaround name. And it’s entirely possible that you’d never need a B round at all.

But in fact it’s a terrible idea. When you launch with that much money in the bank, everyone will hold you to an incredibly high standard – a standard which you will undoubtedly fail to meet on day one, because you are, after all, just a brand-new startup like everyone else. Your product is going to have problems, you are going to have made some bad first guesses about what the product should look like, and there will be holes in your user experience. Just like every single new idea that goes out to market.

Normally that’s not a big problem. You get some users, you figure out what your bad first guesses were by watching and listening to those users, correct the problems, keep messaging people and telling them the product is getting better, and build your way to the product that people want.

But with $41m in the bank, everyone is going to scrutinize you ruthlessly and expect you to be operating at the level of, say, Foursquare, which has only raised half that amount to date and has a pretty great product. (They didn’t have such a great product when they started, but nobody cared because everyone knew it had been paid for out of the founders’ pockets.)

And if you complain about people holding you to unfair standards, everyone will say “what an ass – he raises $41m, then complains when we critique his product”.

So unless you somehow knock it out of the park on day one, it’s a no-win situation.

And of course you don’t need anywhere near $41m to get out the door and do what you need to do. What you need to do right away as a startup is get to product/market fit. As Steve Blank puts it in this awesome, awesome interview, you should only need about $500k to get there. (I don’t know how he comes up with that exact number, but it’s a LOT less than $41m). Get there, figure out your product and the market, have a little bit of runway left over, and then raise another round (or be making revenue!).

It’s funny, if Color had launched with $1m (or less) a good chunk of people would have seen it for what it is said “what a cool app!” And those people would have worked with it, to help make it better. As it stands, I brought it up to a friend on Monday and she said “oh yeah, that app was last week – it’s over, right?

Original post