Does Venture Capital Ruin Companies?

“It amazes me how many companies cannot follow the simple practices that lead to a strong product, great culture, and innovation. How much of it do you think has to do with unrealistic growth expectations out of the gate for so many startups and growing small companies?”Joseph Dressler, a reader with a management role in a media company, recently emailed me with this query.

It’s a great question. It’s true that millions of dollars of investment have been poured into companies that were not ready to deliver on the growth that they promised. The result has been that some founders have gotten the axe — and, in the worst-case scenarios, companies have been shut down. There are a number of reasons for this, including:

Cult of personality. A funding frenzy can form behind a big-name, silver-tongued founder who has had a past success. Unfortunately, the phrase “past performance may not be an indication of future results” applies to both financial investments as well as startup founders.

No product. All startups need some initial money to get going, but excessively funding a startup without at least a prototype product can be risky. There are lots of ideas for new startup out there, but recruiting and managing a team that can actually build something awesome is a whole other matter.

Slow to iterate. In the earliest days of a startup, achieving product/market fit is essential. This requires that the product team be able respond to market feedback quickly. Startups that can’t do this aren’t long for this world.
Stubbornness. Some founders believe that they need to stick to their original product vision no matter what. I suppose they fancy themselves as the next Steve Jobs. But even the best founders pivot and change direction from time to time.

Cheating. Companies that raise tons of money have outsized expectations put on them. Sometimes this leads to desperate decisions like buying unqualified traffic, employing unethical billing practices and cooking the books. We all know how that turns out.

Sweeping problems under the rug. Board meetings are a great place to openly discuss the issues that are facing the company. But sometimes the meetings become a big show where politics rules and real problems are swept under the rug.

Venture capital itself does not destroy startups. In many cases, it is essential to building a great, high-growth company. But too much funding, too early, can put pressure on founders to make decisions that can destroy the very thing they’ve worked so hard to create.

By Matt Straz
Matt Straz was a senior partner at MEC from 2002-2008. He is currently the CEO of Namely.
Courtesy of MediaPost