Money Changes Everything?

Dan Scheinman

Dan Scheinman

Prominent Enterprise Tech Angel Investor

Money changes everything, or so the old song goes. As many of you know, we are now seeing funding records set daily (hourly?) with seed stage companies raising larger amounts at increasingly higher valuations. The new funding mantra seems to be that early money to the right team, can be decisive money. Is this actually true? As part of my tenth anniversary angel investing, I am taking some time to discuss my learnings over the years. I hope this is helpful!

Venture capital funding has a cycle. It goes from being extremely hard to becoming a tsunami of capital (“capital is a commodity”) before something happens and it resets. Clearly, we are now in the capital is a commodity phase of the cycle and early teams are starting to see massive influxes of capital from all sorts of folks who used to invest much later in the capital stack. This has led to me seeing some unhelpful behaviors in company building.

I believe that the art of finding product market fit is core to the journey on being successful at the early stage. What do I mean by product market fit? To me, it is the journey of a company pairing down its initial product and discovering which companies and who its buyers are (and hopefully at what price). All of the great companies go through a process here, and when they emerge, they have the infrastructure to begin to scale the business for growth. Companies that do not figure it out generally run into any number of challenges. I have seen founders that build 3 different products looking the one that will take off with customers, or a founder who has to rebuild sales and marketing to try and redo the fit.

Today, with seed stage companies raising so much money at such attractive valuations, there is a tendency to think that as a founder (or as an investor), the company can buy its way to product market fit. If you run into challenges, go hire more or better product, marketing or sales people. If you need to release 3 separate products, do so because you have the money. The net effect is that I worry we will have a number of bloated, early stage companies who have missed getting product market fit.

If you are a founder with a mega seed round, your VC wants you to spend (“we did not invest for you to earn no interest in a bank account”). I am not sure that is the wise choice. My personal belief is that the first two years of a startup are the most important in terms of building the foundation for later success. If given the choice, I would advise, slow down to go fast. Take time to learn what is the magic formula of features, selling and marketing that works to land customers early. Experiment with pricing to find what works. Find your champions inside your customers. Honestly, few of these things are helped by too much money.

Of course, I lived through the melt down in 2000. I saw a lot of the same thinking start to take over the seed stage investing space. The end when it came was ugly for those who skipped that first product market fit stage.