[m777z]

So, what exactly is the mechanism that makes overfunding lead to a company's failure? I didn't actually find a clear answer to this. The article mentions that less funding would've implied a lower valuation, letting the company get acquired...but then wouldn't the acquiring entity have gotten left with a failing Jawbone anyway?

[michaelbuckbee]

To make a bad baseball analogy: VC is like trying to step up to bat, swinging at every pitch and only considering it a success if you hit a grand slam homerun.

If they'd taken less money, maybe they could have gone after a smaller (but more profitable) niche. Maybe they wouldn't have aggressively hired sales teams in as many countries across the globe.

Look at something like the VR/AR space - right now there's a firm upper limit to the number of potential buyers in that space. So, you have this whole sector where things got overfunded and _weird_.

Like what do you do when you've got $100mil in funding. VCs are expecting a Billion dollar exit. You've made a great product, but the timing is still too soon? That the whole industry needs 5 more years to mature?

[JumpCrisscross]

> what exactly is the mechanism that makes overfunding lead to a company's failure

It covers up problems until it's too late. Remember Color, the social network that spent like $500,000 on domain names [1]? Now imagine those kinds of decisions being made by every C-level executive. That's Jawbone.

Production issues, market-fit issues, et cetera could all be dismissed by management to shareholders and management to themselves on account of the massive, unaccountable cash pile. "Overfunding" means investors shifted too much control to management too early. (By contrast, well-funded teams know they will have to periodically check in with investors for future funding rounds. That motivates explicable behaviour.)

[1] https://techcrunch.com/2011/03/24/color-com-was-acquired-for...

[PaulHoule]

Another harmful effect is that overfunded startups are "zombie companies"; the traditional zombie is an old-school business propped up by a government:

https://en.wikipedia.org/wiki/Zombie_company

However, an overfunded company that is propped up by investors can make competitors unprofitable. For instance, Uber giving out half-price taxi rides has been harmful to everyone in that business. (Of course Uber made a deal to only offer service in the NYC area in NY and ban ride sharing in upstate because Uber wouldn't want to waste half-price rides on people in Albany, Syracuse and Buffalo who won't help them IPO -- and they don't want competitors to emerge there.)

[potatolicious]

IMO there are a vast number of problems caused by overfunding that can compromise a company. Other users have already brought up some.

But the one most salient in my mind is that overfunding removes the pressure to ship.

I've seen this often from repeat entrepreneurs who are able to secure a large amount of financing for their new ventures, and wind up bikeshedding over the perfect product.

Instead of releasing quickly and iterating quickly, the immense amount of cash causes the company to move more slowly than they otherwise would.

Overfunding also bypasses some of the sanity checks that are supposed to exist in the VC system - that a company receives enough funding to get to some future milestone that demonstrates success. A bank account flush with cash removes the need to justify your own existence to investors on a regular basis, and causes companies to not realize strategic errors until it may be too late.

[replicatorblog]

Eric Paley from Founder Collective has written a lot about the mechanics of over-funding. The basic mechanism is that companies start scaling marketing efforts that don't return $1 for a $1 investment.

That's obviously startup 101 stuff, but scale makes a huge difference. Losing money is fine if there is a long term network effect, but more often than not it's just an effort to make toppling growth look good enough to attract a VC in the next round.

So instead of being a modest company, that's nearly profitable with loads of potential, you become a company that is wildly expensive to keep afloat and seem to have less potential since you've already spend hundreds of millions experimenting with acquisition. Instead of having a million potential customers, there are maybe a couple dozen VCs that can make or break your future. That's overly generalized, but here's a reading list for a more detailed explanation:

Wasting Time with the Startup Joneses:

https://techcrunch.com/2015/07/30/wasting-time-with-the-jone...

When Burn Rate Outweighs Enthusiasm:

https://techcrunch.com/2016/01/13/never-let-burn-rate-outwei...

VC is a Hell of a Drug:

https://techcrunch.com/2016/09/16/venture-capital-is-a-hell-...

Overdosing on VC: Lessons from 71 IPOs:

https://techcrunch.com/2016/10/15/overdosing-on-vc-lessons-f...

[michaelt]

  So, what exactly is the mechanism that makes
  overfunding lead to a company's failure?

They wouldn't be a billion-dollar failure if they'd failed with ten guys and $10 million :)

[ajross]

The whole point of an acquisition is that the acquirer can realize value from the acquired firm that it couldn't get in the open market (e.g. via synergy with its own offerings, or by denying its competitors access to the technology, or just as an "aquihire" where the team is the thing being acquired and not the product). It's routine to see companies acquired that don't have a stable revenue stream, or even an obvious path to one. Think Google acquiring Android for a good example.

[buro9]

You need to give your investors a decent return that implies revenue some many multiples of the investment.

If you are over-funded, the products that you have conceived, the markets that you are targeting, these need to change to deliver the return now needed.

At some point, the very company itself has to change to be something else. A lot of companies struggle at this point, and in essence the problem is self-created by taking on too much investment as the original market and product may have been just fine for a lower return that would have satisfied the first few rounds of investors.

[IshKebab]

I think it is that when investors invest, they expect you to use their money to grow quickly. You can't just sit on the money and grow at the same rate.

That means you end up getting huge offices, loads of employees, etc. It becomes a gamble that your product will be successful at a huge scale rather than a natural growth from a small scale. If it fails you still have the hundreds of employees and massive rent, but no revenue.

[Spooky23]

You get lazy with too much money and don't sweat details.

One of the on the ground quick ways to assess whether a company is going to succeed or fail is to look at the supply closet. If it's packed with stuff, you'll find other sloppiness and lack of discipline elsewhere.

[Brakenshire]

Perhaps the company operates in a market niche which doesn't have that much room for dramatic expansion. They could continue as a smaller, profitable company, but they get investment which expects a higher level of growth. So they try to radically break out of their speciality, but over-extend and go belly up.