Ways Startups Die: Raising Too Much
The Allure of the Outlier
One of the strangest things about the startup world is how Venture Capitalists operate. They are constantly chasing what they perceive to be the “outliers”—the massive, once-in-a-decade opportunities.
Oftentimes, founders find themselves in the perfect position to catch this VC lightning in a bottle. Maybe you just graduated from a top-tier accelerator, or you were an early employee at the current “it” company. You have founder-market fit in spades, but you don’t yet have the product-market fit that actually makes a business work.
In hot markets where no one quite knows what the winning formula is, VCs have a mandate to deploy capital. When they see a founder who “looks the part,” they will dump a massive amount of money into the company—often way more than is actually required to build the product.
The Trap: Fundraising Market Fit
When this happens, a founder has two choices. A tiny minority will take the cash, keep the team lean, and quietly hunt for product-market fit while sitting on a war chest.
But the majority of founders fall into a lethal trap. Because they raised a huge sum at a massive valuation, they assume they’ve already won. They think the “market” has spoken. But the market hasn’t spoken—only the VCs have. This is what I call fundraising market fit. The problem with fundraising market fit is simple: VCs are wrong. In fact, they are wrong significantly more often than entrepreneurs are.
The “Saving Face” Spiral
When you let someone else’s intuition—or the hype of a hot market—become the basis for your own confidence, you are almost certain to be wrong about your idea.
Once you’ve taken that much money at a sky-high valuation, you’re locked in. Those VCs now expect you to build a unicorn, and they expect you to keep at it for years. It becomes incredibly difficult to pivot, leave, or find a “successful” exit.
This is a remarkably common way for startups to die. Founders spend years of their lives grinding away on a failing idea just to save face. Instead of looking in the mirror and admitting that the seed round was just a hype wave, they keep the lights on until they burn out.
Raising a ton of money feels like winning, but if you haven’t found the real product-market fit, it’s actually just a great foundation for losing over the long term.