In a post yesterday on StartupNorth, iNovia Capital’s Chris Arsenault put the spotlight on three large VC deals that were recently announced – Beyond the Rack, Fixmo and Shopify. Hist post included interesting commentary about the size of the deals, which are all more than $15-million.
“Obviously, I get nervous when I see a company (portfolio or not) raise such a large chunk of cash. Why? It’s not because I like the small size of the average Canadian financing rounds. Rather, it’s because I think that too much money for a young business can be as bad as or worse than not having enough. $15M-$40M rounds for Canadian tech companies are amongst the largest we have seen this side of the border in over 10 years.”
Whenever I hear about companies raising large amounts of money, one of the first things that comes to mind is how do they spend so much money. I can get raising and then spending $1-million, $2-million or even $5-million but when you’re talking about $15-million or $23-million (raised by Fixmo), that is much more difficult to grasp.
Think about it this way. If you raise $15-million, for example, it’s enough to employ 40 people for four years based on a back of the napkin calculation of $100,000 per employee. Another way to look at it is if you move into a large office to accommodate more people, rent could easily cost $20,000/month, $250,000/year or $1-million over four years.
Let’s say, a company decides to make a few strategic acquisitions for technology and/or people. That could be $1-million or so.
When you start breaking things down this way, raising a large round starts to make more sense, although it would still be mind-boggling to have that much money in the bank.
The challenge for start-ups that raise a large round is obviously having a plan on how to spend it. As well, a company needs to have the right people to effectively and efficiently manage the money so it’s spent on the right things at the right time.
From personal experience, I know having money in the bank is as dangerous to a startup as having no money. One of the biggest issues is thinking the money is going to last forever. Suddenly, you go from being frugal and scrapping to sloppy and frivolous. As well, there is a risk of moving too aggressively too soon, which could see the burn rate soar before it should.
Don’t get me wrong, the ability for Canadian startups to do great deals is awesome but having that much money can be as challenging as having no money.
What do you think? What are the downsides to raising a large VC round? How do start-ups make sure they taken the best approach to spending/investing a major raise.