The mindset of “growth at any cost” is dangerous for high growth startups and ever worse for founders. The ‘Marginal Dollar’ analysis is a good example of this, which TechCrunch made a good argument against.
“The desperation for growth drives the startup to chase the marginal dollar at increasingly greater costs, enduring rapidly increasing losses.” — TechCrunch
It’s almost another way of describing the law of diminishing returns. The more money you spend, and the faster you spend it, the fewer dollars come back for every dollar spent. Starting at $5 returned for every $1 spent, and eventually dropping to $0.50 or lower returned for every dollar spent.
Why would you spend $1 to only return $0.50?
The rationale for this “growth” is the subjugation to hitting major revenue-based milestones for the next round of funding. This is driven primarily by the investors who “need” the company to break through the hyper-growth ceiling in order to make their portfolio numbers work. They sell the story to founders that more money decreases risk. If anything, it likely does the opposite.
This is bad for the company.
This is bad for the founders.
This is collateral damage for (most) investors.
COMPANY: The dangers for the company include long-term systemic issues that will arise from scaling too fast: (1) Creating chaotic, unmanageable internal systems and processes; (2) Setting the cultural tone for low operational expectations and outcomes; (3) Managing unsustainable burn rates that must now be maintained, lest you want to layoff half your staff; (4) Setting market expectations with customers and others for the ‘perceived success’ of the company, an image that must now be maintained. Just to name a few.
FOUNDERS: Founders are losing because every one of those dollars they raised that ineffectively grew their company are dollars that diluted them unnecessarily. Not only that, but the additional capital they brought in from investors raises the bar for them to find success and to be rewarded for the risks they have taken — -meaning that they have to now exit even bigger. The higher that bar, the lower the likelihood of achieving it.
INVESTORS: For most investors, this is par for the course. Collateral damage on the path to a successful fund portfolio. They don’t have the same risk profile as the founder because they have dozens of companies in their portfolio. If one fails, that is the expectation. Simply the price you pay in order to find the 1–2 in the portfolio that hit unicorn status and cover all the companies which failed when prematurely scaling.
Don’t take the bait and raise more money that you don’t need, even at a much higher valuation. More money will not increase your likelihood of success. If anything, it decreases it.
Founders need to be wary of the ‘Marginal Dollar’ and understand the implications of scaling unnecessarily fast. Why risk having to exit for $500 million when you could raise less money and exit for $100 million and put the same number of dollars in your pocket?