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By Eric Paley, Managing Partner

🤖 Product-first companies are inspired by a breakthrough in technology or UX.

Awesome!

📈 Market-first startups are built in response to glaring inefficiencies.

Awesome!

🤑 Capital-first startups are catalyzed around access to capital.

Beware!

Capital-first startups start with a hazy sense of a problem, a rough idea about how a product could solve it, and a crystal clear conception of why they should raise maximum money, now, and at the highest possible valuation.

Spotting these startups is easy:

🏀 They build teams before they’ve tested a hypothesis

🏙️ Space is leased before wireframes are crafted

📜 Press releases are issued before customer personas are fully baked

📢 Buzz campaigns are ramped before any sales

This approach is seemingly enviable!

The founders who can pull this off have often had early-career success. They’re enmeshed in networks that make connecting capital easy. Crafting compelling pitches to suit the themes of the day is second nature.

I say this is “seemingly enviable” because building your startup on your ability to attract capital is dangerous. This approach allows founders to get out of the gates quickly while almost certainly spelling their doom.

Here’s how:

In the earliest days of your company, time, not money, is likely to be the gating resource. It takes time to understand the market. Iterating on the product requires cycles. Testing channels and price discovery can take a while.

It’s much easier to undertake these projects with a skeleton crew. But the dynamics of the typical capital-first startup won’t allow for that. They hire rapidly to try and solve these problems in parallel and live up to lofty capital infused expectations.

This rarely works.

Capital first companies start with high valuations paired with high burn rates. This removes any margin of error and leads founders to chase vanity metrics over value creation. And to be fair, this can work for a time!

But it only works as long as you can keep your investors excited. Invariably, their enthusiasm will run out, and you’ll be left with the husk of a company:

These startups end up saddled with debt from short-sighted product/hiring decisions that were made in order to juice short-term growth. And no understanding of how to grow organically:

More importantly, the promising concept at the core of your business will be wasted. There are cases and classes of entrepreneurs that do need capital early in their lives in order to get started, but that is seldom the case in these scenarios.

In many of these scenarios, the founders I’ve talked to have the financial capacity to get started without investment or a tiny pre-seed, but the status that comes with venture dollars and the attendant perks — team, offices, etc. — is too tempting to pass up.

I sometimes worry I sound like a doctor telling people to eat their broccoli. Unfortunately, I don’t have a flashier message. When it comes to building companies that last, there is no school like the old school.

Capital can’t find your market, identify real problems, forge deep solutions, and create lasting value. Abundant capital is a multiplier when you have these things and compounds negative value when you don’t. Remember, capital has no insights!

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