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Why too much capital can kill you.

The seeds of failure for a company are planted when times are good – and there’s no better time than right after raising a big round of capital, right? Add a young team that is at once self-confident and inexperienced, and all the ingredients for disaster are there. Conventional wisdom has it that companies should raise as much capital as they can. Conventional wisdom, for the record, is wrong. Too much money can be a deadly affliction. Here are nine reasons why. (This was supposed to be a Top 10, but since the theme here is less-is-more, you’re getting less.)

Too Much Money!

It fills a company with fear.
This is a vicious cycle: Big money breeds big-time fear, and the knee-jerk reaction is to spend one’s way out of it. What kind of fear? Fear of not looking cool. Fear of not knowing what you don’t know. Fear of looking like you’re out of control. This is why well-financed startups have beautiful offices with corporate art, in a high-rent part of town. By contrast, if a company doesn’t have much money, it doesn’t have time to be afraid. It has to implement. It’s not worried about looking cool because it’s more worried about not looking dead.

It lures companies into implementing unsustainable business models.
Too much money makes entrepreneurs believe that selling $100 bills for $90 is a sustainable business model. (And then if they increase prices to $91, they declare that margin has improved!) Just-in-time and just-enough capital is discipline, and discipline leads to developing whole products for specific customers. It also leads to audacity, Trojan-horse marketing, evangelism, and working around the resistance of distribution channels.

It causes companies to use buzz to get customers instead of using customers to get buzz.
The best kind of buzz is the kind produced by customers. Customers are the result of good products and good service. When companies have too much money, they try to buy buzz with fancy rollouts and expensive tchotchkes in order to get customers. That’s backasswards. It’s a lot cheaper and more effective to let customers generate buzz than vice versa.

It makes companies abdicate important functions to consultants.
Fear’s back – this time it’s fear of not looking professional. When companies have too much money, they hire professionals who charge twice as much for half the results and leave the companies with little in-house expertise. When companies don’t have much money, they figure out a way to name the company, design the logo, create the Website, find the customers, and recruit employees. (Power tip: You can tell the former is happening at a company when it brags about using a publicly traded Web-design firm to create its Website.)