Toxic VC and the marginal-dollar problem

So about that warning label, perhaps it should be: “Founders: Burn Responsibly.”

Think of your company as a car in a race to cross the country with an engine that’s leaking gasoline. The faster you accelerate the engine, the more the car leaks and the greater the risk of explosion. You have two options. You can slow down the car, pinpoint the problem and fix it; or, you can just keep pouring more gas into the tank, hoping for an infinite supply, and accelerate at maximum speed — all the while praying that the fuel leak doesn’t lead to a catastrophe along the way. So the car goes faster and faster with a decreasing rate of efficiency and an increasing probability of tragedy.

Origen: Toxic VC and the marginal-dollar problem | TechCrunch

Capital can be used to hide these constraints for a period, but typically capital only magnifies the problems over time. Money has no insights on how to fix a broken business. Great businesses solve these problems first and then use capital to intelligently scale models that are clearly working.

We often hear founders and investors argue that the problems in their companies can be fixed as the company scales. It’s not hard to imagine Fuego acknowledging the major problems with the economic engine of the business, but rationalizing that capital can be used to both scale the model and fix the model at the same time. This is very seductive logic, because it allows everyone to keep playing the grow-at-any-cost game while pretending that the problems will get solved later.

Fuego’s VCs invested with the goal of building toward a billion-dollar exit. They invested because they believed in Fuego’s potential — why would they go slow? That would be admitting to themselves and everyone else that the investment thesis was invalid. They convinced the partners at their funds that this was going to be the next home run, how can they pause now?

The burden on the founders is immense. The founders sold the VCs on this billion-dollar future. How can they get cold feet now that the cash is in the bank, even if the model is broken? If they cut back on the burn, talented people will get the sense the company’s prospects are dimming and leave. Appearances must be maintained!