The perils of overfunding your business

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By Christine Thoma, head of strategy, Zeal Investments

A common assumption among start-ups is that the more funding they receive, the better their chance of flourishing. Unfortunately, a large pot of money does not guarantee success. Rather than focusing solely on the amount, here’s why securing the right investment at the right time and spending it smartly is more important.

Over-saturated markets

When there is a buzz surrounding a specific sector, investors become overly enthusiastic and focus their cash in one direction. This results in a lot of undifferentiated tech making it all the way to market. These start-ups then fail to regularly tweak their offering to meet their evolving customer needs. The result, a large proportion of these companies fail to take off or truly disrupt the status quo.

Alternatively, when your business doesn’t get huge cash injections early on, you work harder to refine your business model and investigate your target audience. Successful start-ups put data analytics and customisation to good use and focus on their customers’ pain-points. This helps them develop a value proposition that is unique and relevant to their customers’ needs.

When money is no object, start-ups can become complacent and forget to pay attention to their customers. As soon as the customer is not front and centre, it’s the beginning of the end.

Over-inflated value

Let’s highlight this point with an example. Remember Jawbone? It was the consumer electronics company set to take on Fitbit in the health tracking tech market. It raised over $900 million from renowned venture capital firms.

At its peak, Jawbone was valued at $3.2 billion. Nonetheless, in July 2017, it folded.

Too much funding worked against Jawbone. The value of the company was too heavily influenced by over-funding rather than its actual revenue and profitability. The investment ultimately priced Jawbone out of the market. So when it tried to sell itself in 2016, it couldn’t find a buyer.

Of course, a large investment provides a start-up with a sense of security. But it’s crucial that you don’t lose sight of your business goals. If something isn’t working, don’t just pump money in to fix it – you need to properly evaluate the issue and tweak accordingly.

Overindulgent decision-making 

When money isn’t an issue, it’s easy to plough lots of money into everything. Suddenly you’re splurging on plush offices and pricey advertising but spending little time on your business fundamentals like product development and customer engagement.

With near unlimited funds, you’re not forced to be as disciplined, agile and nimble – all key traits for a successful business. It’s too easy to become distracted by the latest technologies and leap into new markets before fully nailing down the first one. If you spread your resources far and wide with little focus, you only end up with less money in the pot to overcome serious problems.

Don’t be blinded by a flashy investor ready to write you a blank cheque. You need to partner with someone who you can collaborate with. Ask yourself, what can this investor offer over and above funding that will help you build a long-term, sustainable business plan?

Regardless of how much investment you receive, it’s absolutely critical to stay on top of your business objectives. And more than anything else – always keep your customer in your sights. Do this, and you’ll have a greater chance of success – no matter how much funding you receive.