Startups In Early Markets Easily Drown When Given Too Much Money

Startups In Early Markets Easily Drown When Given Too Much Money

Some companies are too early in a market. This happens often, and the most common scenario where it would happen is where an idea that is working in an advanced market is transplanted to an emerging market.

In my opinion, the biggest threat for such a company is raising too much money very early. My logic is as follows:

Companies will adapt themselves to the amount of money they have. They will base their hiring, their office space, their marketing spend not on how much revenue they have, but rather, how much money they were able to raise. Their monthly spend will tend to rise to a level where they would run out of money-in-the-bank in 18 to 36 months. This is because this is the common narrative told to them by both the blogs they read, as well as the people giving them money.

So long there is money in the bank, the company can continue to maintain this level of spend without any problems.

The issue with being in an early market is that before 24 months are over, the company will recognize that the market is too early. That means that growth will not come at the level they expect. Revenue will not rise as well as expected. The growth will not be equivalent to the amount of money raised – and it will start to show.

The investors will get nervous and start being careful with giving more funds. So the company will start trying to raise money externally – and another characteristic of early markets is that there are few funders. So you end up with a situation where existing investors are pulling back funds and new investors are not investing easily.

After the initial easy raises, the company is only able to raise far less money than it is used to – an effect of ‘having learnt about the market’.

The problem is this – it is very hard for companies to adjust their burn rate downwards. People are used to certain salaries, people are used to certain offices, people are used to certain perks.

Often, the burn adjustment is superficial – the company cuts some expenses, but adds more in a way such that it’s still living a dangerous life.

And before long, the company needs money again. Now everyone is nervous – the management staff, the investors, and the company starts doing strange things in the hope of either raising more money or becoming profitable quickly. Those strange things it does are what kill the company. I call them ‘strange things’, because it depends on the company, founders, etc, what exactly crazy idea they come up with at their strategy retreat.

Soon, the company is in a hole, people are angry and nobody is thinking about innovation anymore.

Then a smaller, newer startup with much lower burn comes into a market that is much bigger than it was 3 years ago and starts growing rapidly. The VCs suddenly get interested again, and fund this new startup to become the big hit. While the old one is stuck in internal problems, and has stopped moving.