The Slippery Slope of the Venture Capital Startup Growth Trap
Four ways to make sure you’re not just throwing money at growth to see what sticks
Here’s a move out of the venture capital playbook that tends to punch entrepreneurs in the gut.
Investors give your startup a bunch of money to scale, they expect you to hire seasoned people for critical roles, then they start asking why your burn rate is so high.
The next thing that happens is a strongly implied suggestion to “trim the fat.” Then things get dark while you figure out how to cut people without killing both productivity and morale, which — spoiler alert — you can’t.
Then all the up-and-to-the-right charts go down-and-to-the-right for a little while. Then the investors ask what happened to all that money they gave you.
I’ve seen this happen over and over again, and I’ve actually been caught in the trap myself. I’ve learned that this is all pretty much the startup’s fault, and I’ll explain why and how to sidestep it.
Investors want lean teams
Venture capital investors love lean teams the same way little kids love birthdays and love cake — so they go apeshit over birthday cake.
In other words, investors love lean teams because of the combined economies of scale:
- If two people each generate X revenue, then working together as a team they will generate more than 2X revenue.
- If that team can make a profit for X cost, then a lean team will make more profit by finding ways to reduce that cost.
Then crazy projections get made and money gets thrown at it.
That’s when the trap springs, because economies of scale work on a curve, not a spike, and they always, and I mean ALWAYS, produce friction before they produce results.
Here are the main four ways the startup sets its own trap.
The startup hires too fast
There’s some ancient conventional wisdom around startups and money that boils down to “If you can get the money, take it.”