The 5 Hidden Costs of Getting Funding


Coins Money

Funding, funding, funding. It’s all many founders, and most of the popular media, seem to care about. Yet, getting funding is not a guarantee of success. Far from it. In fact, there are a number of hidden costs associated with getting funding that founders ignore at their own peril.

1. Trying to get funded is a full-time job (or, the opportunity cost of courting)

When you start a business, you know it’ll be a full-time job (and almost certainly more). And that doesn’t even include trying to get funding. Unless you already have product/market fit with an established customer base that provides growing monthly recurring revenue (and, if you do, chances are VCs are approaching you), getting funding is hard and time consuming. You may have a great idea, but so do most other founders who approach VCs. Given the shear quantity of companies courting VCs, it’s not hard to see why you will get rejected, time and again, by most of the VCs you approach. This is a major time suck and an emotional drain.

Even worse, there is a significant opportunity cost associated with trying to get funding. Think of all the other things you could (and in most cases, should) be focusing on: building the right product, talking with potential customers, hiring the right people, setting up marketing campaigns, establishing the right culture, and much, much, more. So while getting a few million dollars in VC funding might help your company grow, the question you should be asking yourself is actually much more complicated: “Does the high cost of looking for funding outweigh the potential benefits of actually getting funded?” In many cases, the answer is ‘yes’.

2. Funding can actually reduce your runway

This is a seemingly counter intuitive point. Runway is defined as “the amount of time until your start-up goes out of business, assuming your current income and expenses stay constant.” So it would seem that getting funded would increase your runway. Not necessarily.

To understand why, we have to delve into a bit of elementary math. A simplified way to calculate runway is:


Supposing your company had $100k in the bank, your monthly expenses were $20k, and your monthly revenue was $10k, your runway would be:

png (1)

In plain English, that means that all else being equal, your start-up has 10 months left before it runs out of money. Now, let’s imagine you received VC funding worth $1 million. Here’s your new runway:

png (2)

Great news, the $1 million in VC funding gave you an extra 100 months of runway! Not so fast. To arrive at an extra 100 months of runway, we’ve made one critical assumption: that after receing funding, your expenses will stay the same. For most start-ups this is not the case. Think about it. You didn’t raise a bunch of cash to let it sit in the bank. No, you raised the cash in order to hire more people, lease additional office space, put new marketing plans into action, provide additional perks to employees, and more. Thanks to getting funding, it’s easy to imagine your expenses increasing from $20k per month to perhaps $150k per month. Let’s look at your new runway:

png (3)

The extra $1 million in funding has actually decreased your runway by over two months! Yes, I’ve assumed that your monthly revenue doesn’t increase as a result of the injection of cash, but the point remains the same. VC funding can, and in many cases does, decrease your runway.

3. Loss of control

This one is perhaps more obvious. Founders quit their jobs to start their company for many reasons, but one of the most common is that they want to regain control over their lives by becoming their own boss. For bootstrapped companies, this dream can easily become a reality. Not so for venture-backed start-ups. Most VCs will want a seat on the Board of Directors, many will involve themselves in the company’s strategic decisions, and some may even make their funding contingent on replacing you as CEO. Depending on your goals as a founder, this may or may not be acceptable, but getting a VC involved with your start-up certainly involves giving up a lot of control over the business you worked so hard to found.

4. Loss of potential upside

The potential for a large financial payoff may not be your primary motivation for starting a company (in fact, it shouldn’t be). Nevertheless, have you ever met a founder who didn’t dream of financial success? Me either. With this in mind, think twice before accepting VC funding. To explain why, let me paint a picture of two successful companies:

Company A

This company is bootstrapped and the sole founder controls 100% of the shares. It recently sold for $10 million (yay!), and the founder keeps all $10 million.

Company B

This company took multiple rounds of VC-funding, and as a result of dilution, the sole founder controls only 10% of the equity. In order for the founder to make the same $10 million as the founder of Company A, his company will have to sell for at least $100 million (10% of $100 million).

Building a $10 million company is hard enough. Build a $100 million company is a completely different story. For most founders, the trade-off is simply not worth it.

5. The goals of those who fund are often not the goals of those who found

VCs and founders don’t always see eye-to-eye, to say the least. The VC business model relies on positioning companies for a quick and highly lucrative exit (irrespective of whether that exit is via acquisition or IPO). Without an exit, VCs will never make enough money to justify their initial investment. In fact, the type of company that VCs hate the most is the “living dead” (companies that are not hitting it out of the park, but aren’t running out of cash either. These zombie companies simply live forever, making reasonable, but not incredible, amounts of money. VCs hate them because they are a time-suck. They are still part of the VC’s portfolio, yet their potential upside is limited).

Living dead” companies may be a VC’s worst nightmare, but for many of their founders, they aren’t so bad. They might not lead to a $100 million IPO, but they can still easily lead to becoming part of the 1%. In short, founders of most “living dead” companies are able to live a very comfortable lifestyle.

But since VCs want a big exit, they will push you to make decisions that lead to a big exit. While on the surface this sounds great, there are consequences. As a founder, you may wish to grow slowly as you find product/market fit. VCs probably won’t like this. As a founder, you may have an offer to be acquired, but might not be ready to give up control and want to decline. VCs may not like that, either. In short, the goal of every VC is to make a lot of money, as quickly as possible. That’s not the goal of every founder, every time.

In Summary

All this goes without saying that for some start-ups, getting funding can be the right choice. The word “strategic” is overused in the business world, but in this case it applies. Start-ups should look for funding for strategic purposes only (for example, when the success of the business depends on being able to expand quickly, or when the business is capital intensive). In all other cases, founders should think twice before approaching VCs. The hidden costs in getting funding can be quite high.

Why Retrium?

This past week, I told my boss at work I’d be quitting my job to be the co-founder of a startup, Retrium. Over the years, I’ve had plenty of ideas — some more successful than others — but I never quit my job to work on them. One might reasonably ask: why go “all in” on this one? In other words, what makes Retrium different from my past entrepreneurial endeavors?

Good question! Here are three reasons why I believe Retrium has a really great shot at becoming a very successful company:

1. Broader Market Forces

Retrium is a toolbox of facilitated retrospective techniques built specifically for distributed scrum teams. If you’re not in my target market, that might sound like a jumble of jargon, but it sits at the intersection of two powerful market forces:

  1. The increasing popularity of remote work and distributed teams
  2. The incredible adoption rate of agile and scrum within the software development community

Let’s start with the first one: the increasing popularity of remote work and distributed teams. According to ESNA, 20% of the global workforce telecommutes. More anecdotally, we’ve recently witnessed the incredible popularity of websites like Nomad List, which provides information about the “best cities to live and work remotely”. We also have lengthy crowdsourced lists of startups with a distributed workforce. In short, companies have begun to realize the importance of hiring the best talent, regardless of location. This trend is only going to continue as technology gets better and better at reducing the friction of a distributed workforce.

The second market force is the incredible adoption rate of agile and scrum within the software development community. The jury has decided, and agile has won. What began as a simple manifesto has turned into powerful force that is helping teams produce better software, faster. This is true, of course, for the startups of Silicon Valley, but it’s just as true for the multinational enterprises of New York and the nonprofits of Washington, D.C. After all, who wouldn’t want to be more agile?

Clearly, there are plenty of pain points left to solve in both of these relatively nascent markets. Retrium solves one of them.

2. External Hooks That Naturally Reduce Churn

The biggest challenge to the sustainability and profitability of any SaaS company is customer churn. The simplest definition of churn is “the rate at which customers cancel their subscription.” Why is churn so important? For each customer that cancels their subscription, a company has to find another just to maintain current revenue. If a startup wants to grow, then its customer acquisition rate has to be greater than its churn rate. Clearly, the higher the churn rate, the harder this is to accomplish.

One of the best ways to reduce churn is to have a high level of user engagement. After all, users who are engaged with your product are less likely to cancel. One of the things that excites me most about Retrium is the fact that it has a high likelihood of having extremely low customer churn.

Retrium benefits from something I call an “external user engagement hook,” which is something that encourages customers to use your product from outside the product itselfRetrium’s external user engagement hook is the scrum framework, which requires teams to run retrospectives on a regular — and frequent — basis. The hope is that every time a team needs to run a retrospective, it will be reminded to use Retrium. Having an external user engagement hook can be an incredibly powerful driver of low churn, and it makes me confident in Retrium not only as a product, but as a business as well.

3. I’m Passionate About It

One of the worst mistakes a founder can make is to start a company in a market that he or she is not passionate about. Popular culture would have you believe that founding a startup will lead to a glamorous life full of parties and ritz. The reality is quite the opposite — startup life means hard work — really hard work. As a result, founders of startups can burnout quickly, especially those who start companies in markets they aren’t personally passionate about.

As for Retrium, I’m fortunate that it’s at the intersection of two areas I’m truly interested in: agile software development and distributed teams. In fact, Retrium itself is being built with these concepts at its core. Not only are we using the scrum framework to develop Retrium’s code, but we’re also a fully distributed workforce (we have no office).

Looking Forward

None of this means that Retrium will, in fact, be successful. Most startups fail, and it’s far too easy to live in a positive echo chamber that can lead to overconfidence in your idea. Nonetheless, I truly believe the future for Retrium is bright. I’m excited to get going.

Coming soon: a post describing how I got the confidence to quit my job and start Retrium. I’ll give you a hint: Lean Startup.

Getting an MBA vs. Starting Your Own Business

kaboompics.com_Girl reading a notebook

Let’s start with the profiles of two high-success individuals who are about to embark on two different life adventures.

Individual #1 (We’ll call her Lucy)

After graduating five years ago with a bachelor’s degree in Computer Engineering from MIT, Lucy took a job as a software developer at a large corporation. Her starting salary was a healthy $90,000. In no time, Lucy was identified as a high potential employee. She was quickly promoted to project manager, then to senior project manager, and was correspondingly given multiple raises resulting in her current salary of $125,000. As she moved up the corporate ladder, Lucy started to realize that she lacked some of the foundational business knowledge that her older, more experienced colleagues seemed to have. So she decided that it would be a good idea to quit her job and enroll in a fulltime MBA program. As a star performer with great references and a solid academic background, Lucy was confident that she would get accepted to a top-ranked business school. She knew the costs are high: $170,000 in tuition payments plus an opportunity cost of $250,000 in lost salary, for a grand total of $420,000 in lost income over two years. Yet, with the support of her family, she decided to go for it. After applying, interviewing, and nervously waiting for a decision, Lucy finally got the good news: she was accepted to Harvard! When she told her parents, friends, and colleagues of her decision to leave her corporate job and get a Harvard MBA, they were immediately supportive (“you’re lucky to be able to attend such a good school!”) and wished her the best of luck.

Individual #2 (We’ll call him Tom)

Tom is a technical wizard and a natural leader. He’s the rare combination of a geek who is also an outgoing, personable guy. He’s five years out of Stanford University, where he graduated with honors with a Computer Science degree. Upon graduation, he was recruited by all the hot Silicon Valley companies – Google, Facebook, Apple. Now, he’s a rising star and a lead engineer and has been told by the suits that he has the potential to become a “big deal” at the company. His starting salary was $90,000, but he’s now making $125,000. He’s generally happy with his job, but he also feels that by working at a big company, he’s missing out on his lifelong dream: to start his own business. One day during his daily 6:00am morning shower, Tom has a flash of genius: an idea that could change the world! Tom hurries into the office, excited to tell his closest friend at work about his idea (and secretly hoping that his friend would be interested in becoming a cofounder). It works! Tom and his friend start working on the idea at night and on weekends. One day, after receiving yet another urgent email from his boss (they always seem to be urgent), Tom decides that it’s time. He walks into his manager’s office and tells her that he’s quitting his job. That same evening, he calls his parents to tell them the news. The reaction is predictable: “You’re doing what? Tom, you could lose everything! What if it fails? Are you sure this is a good idea?

What People Think About Lucy and Tom

The difference in reactions to Lucy’s and Tom’s decisions is not mere hyperbole; it’s how most people in our society think. At first glance, there’s a good reason for that: Lucy is smartly investing in her future by getting a Harvard MBA while Tom is risking everything, since the vast majority of startups fail.

What’s So Different About Lucy’s and Tom’s Paths, Really?

Let’s look at what Lucy will most likely get from her Harvard MBA:

  1. A really great business education
  2. An amazing lifelong network
  3. A guarantee of lost income in the short run
  4. Hopefully a lot of extra income in the long run

And here’s what Tom will most likely get from founding his startup:

  1. A really great business education
  2. An amazing lifelong network
  3. A guarantee of lost income in the short run
  4. Hopefully a lot of extra income in the long run

That’s the thing. The expected outcomes of getting an MBA and starting a business are nearly identical in almost every way. Both are opportunities to learn. Both are opportunities to meet people. Both are guaranteed to lose you large sums of money in the short run, while having tremendous potential to make you a ton of money in the long run.

What Needs To Change

Despite the similarities in outcomes between the two, most people consider quitting your job to found a company to be an extremely risky activity, while quitting your job to go back to school to be a worthwhile investment. This needs to change. Yes, of course starting a business is risky. But starting a business, like getting an MBA, is also a worthwhile investment in your future. And that’s true even if your company fails. The business skills you will gain and the people you will meet will, in the long run, open doors for you.

So the next time someone you know quits his or her job to start a company, treat it the same way you’d treat someone who is going back to school. Both are deserving of praise.

Excited to announce Retrium — distributed retrospectives made easy

For the past few months, I’ve been hard at work in my spare time on a startup in the agile/scrum space. Along with my co-founder, Ryan Detweiler, I am very excited to reveal it to the world (or, at least to those select few who actually read this blog!). It’s called Retrium — and it’s a tool that makes sprint retrospectives easy and effective for distributed scrum teams.


Here’s why we’re building it. If you’ve ever worked on a team that uses the scrum framework, then you probably know all about sprint retrospectives. Most likely, you’ve been exposed to retrospective facilitation techniques like 4Ls, Lean Coffee, The Wheel, or Mad/Sad/Glad (no? you should try them!). Here’s the problem: all of these techniques require flipcharts, sticky notes, markers, and other physical tools. While that’s fine and dandy for collocated teams, geographically distributed teams are left out in the cold. That’s where Retrium comes in. We want to bring the power of these retrospective techniques to distributed teams.

Here’s what it is. Retrium is a set of super-simple interfaces to some of the most popular retrospective techniques. It is completely device independent, so you can use your phone, tablet, or desktop to participate. Retrium is also a facilitator that guides you through the retrospective itself. Don’t know how to run Lean Coffee? Don’t worry, Retrium takes care of that for you. Finally, Retrium doesn’t try to do too much. It isn’t intended to replace video conferencing, it merely complements it. In fact, we recommend you run a video conference while you run a Retrium-powered retrospective.

Here’s our timeline. We are aiming to launch our MVP in the summer. In the meantime, in good lean startup fashion, we have a pretty landing page with a place to enter your email if you’re interested in hearing more.

So that’s it. If this resonates with you, reach out and get in touch! Please email me so we can schedule a time to chat.

Retrium — retrospectives made easy.