Overfunding a Business: Good Way To Stifle Talent and Innovation
This post is by Mike, CEO of Junction Networks
Over at the American Express OpenForum site, Guy Kawasaki wrote an excellent post about how too much money can be a bad thing for startup companies. Ed Sim who runs the Beyond VC blog wrote a similar article back in 2006, which I've kept bookmarked.
Guy Kawasaki takes the argument one step farther than Ed Sim; Kawasaki outlines specific examples of what too much funding can do to a company. He makes many great points, but I'd like to focus on those regarding human resources:
Money Makes Companies Hire “Proven” People
Junction Networks recently hired two amazing engineers; one was right out of college. Yes, we wanted a fresh perspective on things. Yes, we wanted someone who grew up with the latest technologies; but, at the same time, we had budget constraints. What we got was two race horses sitting in the starting gate ready to go. If we'd hired someone with more experience and higher salary requirement, we may not have found this passion and readiness.
Another possible problem with 'proven people' is that they think they've done it all before. The truth is that if you're a start-up, hopefully you're doing something few, if any, people have done before. What worked at one place might not be a one-size-fits-all solution. You need to stay flexible.
I would also expand this point to proven technologies. There's a saying, "No one ever got fired for buying IBM," which means that buying the highly expensive and supported option is the safe bet. But, top of the line often doesn't fit in a tight budget. Therefore, tight budgets force employees to think up creative solutions to their problems. When you're on a budget, you can't buy your way out of a problem.
Money Makes Companies Buy People with Salaries
Guy's point here is that companies buy people with money instead of stock options and evangelism. I'd say the corollary to that is that you end up hiring people who are mostly, or solely, motivated by salaries as well. What you want - nay, what you need - as a start-up are people who are motivated by creating something new. You want people who are excited about stock options, excited about building and creating, and are then motivated to help you build.
Junction Networks is not a VC funded entity. Guy's points, especially his points about hiring, really resonated with me. We have been very, very lucky with our hiring. We have a great team here at Junction Networks. We've been able to hire smart talented people to help us build a great product.
The Real Question: Why Overfund?
The real question with all these points about how over-funding a company is bad, why do VC's continue to do it? Is there a better way? I don't know.
Maybe it'd be better to make a bunch of 'seed' investments - $50,000 or $100,000 for a small equity stake just to let companies get off the ground and nurture them along. This seems to be a better solution than just a few multi-million dollar investments that lead to over-marketing and over-hiring. Hopefully, this will be the next wave of VC. Until then, we'll just keep doing what we're doing and continue to hire the best and smartest people we can find, whether or not they have a proven track record.
