Inflated costs, reckless spending of the raised funds, distancing from market realities – unfortunately, these are often the characteristics of companies that have been financed only with investors’ money since their inception. In principle, there is nothing wrong with this – the role of capital is to significantly increase the pace of development. The problem is that the financial structure is often arranged in such a way that the capital becomes a fixed point of income, which allows you to gain attractive margins. In the meantime, the business is diversified, investments go into development. Suddenly, there is a crisis, investors increase risk aversion – they want to see traction. The company’s management makes a decision – we cut costs. And in fact, there is a lot of room for reduction – unfortunately, even when those are introduced, the company is very far from achieving profitability from its sales and without another financial injection for which it has no right. The only remaining solution is to liquidate.
Investors’ money is to increase the dynamics of the company’s growth, enabling costs that would otherwise be available only at a later stage. Financing foreign expansion, developing new product functionalities, expanding the technology’s scope of use – these are just some of the activities that can actually help build a market advantage. Unfortunately, founders often prioritize expenses poorly and cashburn grows in all the wrong places. A larger payroll, a nice startup office, distant delegations, benefits building a community – yes, it is all important, but these costs should only happen when the core business is stable. There are, of course, exceptions – technologies and ideas so advanced that they cannot be built in the short term without the support of investors. However, this vision, due to the availability of capital, begins to be shared, for example, by SaaS startups, whose MVP can be done for PLN 100,000, but in their budgets sometimes a million in the pre-seed round is not enough.
A special form of pathology is the situation in which external financing becomes an end in itself. The founder fights for subsequent rounds or grants to have something to live on. There are many start-ups in Poland that have been operating on the market for a few years, have already received all possible subsidies from PARP or NCBR, and still claim that they will soon be able to finish a product that will change everything. They have mastered writing applications and their implementation, they have exceptional skills in attracting investors – so many have already agreed. But their fundamental problem is that the market does not want their products or the demand is too small to finance the operation of a company that has already gained a certain scale after years. The question is, do they really not see it, or are they just pretending?
The comment section adds:
Sounds like the post is about WeWork
I can’t imagine pumping money into issues that are not crucial for building a business at the very start of a company. Sure, fancy office and benefits are important, but not at the stage where you have to build everything from scratch and work for the first traction.
I hear such stories from candidates who have previously worked in this type of companies. The post corresponds with their attitude..
I also often hear people looking for advice – they see that something is (not) happening in the company and they don’t know whether to look for a new job or wait.
I met many people leaving such organizations. They often feel disappointed because, as employees, they had high hopes for the product/service they participated in.
Valuable comment. Building a company is more than ‘merely’ having an idea. As for raising funds, what is happening in the area of startups rather resembles the history of funds for the ESF, and then for foundations.