Money is without a doubt at the center of gravity of the startup world. Even when people are talking about companies that have changed the world like Google, Apple, or Microsoft, the focal point of the story is always the huge market caps of the companies or the fortune of their founders and investors. And when we are talking about up-and-coming startups, the main point of interest is the amount of money they’ve managed to raise.
Of course, it would be foolish to claim money isn’t important for startups. Money is just as vital for the survival of a startup as food is vital for the survival of a human. Moreover, money is used as a measure for startup success because it’s quantifiable and familiar to all people. However, if you think money is all that matters and more is always better as a startup founder, you can easily run into trouble.
In the early startup stages, more money can rarely solve your startup problems. It’s often the case that before you find product-market fit (the market wants what you are offering), your startup acts like a black hole for money with the magic ability to swallow all the money you throw into it with little to no difference in the outcome.
In fact, according to the Startup Genome project, premature scaling is the main reason for startup failure. Throwing a lot of cash at promotion before your offering is validated, investing a lot of money for hiring before you need the workforce, or even raising too much capital before your venture is ready is all premature scaling.
Money In the Discovery Stage
The discovery phase is all about narrowing down on a good startup idea. Since this phase is about your understanding of the market, money is practically useless. The main thing you have to do is to talk to your potential customers and to validate or discard ideas based on your findings.
Money In the Validation Stage
The validation phase is about developing a startup product and testing it against the market. In some cases, this could be done for very little money (discounting the labor of the founders) thanks to modern technology (no-code solutions, etc.). In other cases like e.g. physical products, the development of a prototype would require some kind of investment.
Even in the most expensive cases, however, this should be in the range of tens of thousands or even thousands of dollars. At that stage, your startup simply has no use for millions.
Money In the Efficiency Stage
Once your minimum viable product is ready and has successfully indicated product-market fit, you need to move onto developing a sustainable, scalable business model. Do the unit economics work out? Are your efforts to sell your product profitable?
The money required in this stage depends on how fast you can narrow down on a sustainable business model. Since your sales usually wouldn’t be enough to support the business, you need to have enough money to stay alive until you reach the growth stage. If your team is small, this could once again be done cheaply. If your company is bloated, however, you might run out of cash before you are successful in your search.
Money In the Growth Stage
Finally, the brute force of money can pay real dividends only once you have product-market fit combined with a sustainable business model. If you are certain this is the case, then being ambitious in fundraising and promoting aggressively (trading money for growth) is usually the right strategy for innovative startups.
The only real consideration in this stage is the size of the total available market for your startup. If you raise too much, your investors could be unhappy even if your business is growing and profitable.
To sum up, entrepreneurs need to be conscious of the stage of their venture and shouldn’t over-extend in hiring, promoting, or even fundraising before their startup can justify it. Startups find success through finding product-market fit and a sustainable business model, and money is just a means to end up to that point. The money that matters is the money that your clients willingly pay you.