Why money is the fastest way to kill your startup, according to a CEO who sold his last company for nearly half a billion dollars
- Yuchun Lee says that every week he turns down or ignores multiple unsolicited offers from investors interested in funding his Boston-based software company, Allego.
- Lee says that his reason for turning down investors' cash is strategic: There's plenty of downsides to taking in too much money too soon.
Yuchun Lee, founder of sales software startup Allego, is no stranger to turning down investors' cash. Since he founded his company five years ago, the Boston-based entrepreneur has turned away scores of interested investors and venture capital firms, he says.
"I'm constantly getting unsolicited offers," said Lee. "I get pinged just about every day - people sending Federal Express packages to my office, trying to make it seem like I have a fiduciary obligation to talk to them."
Again and again, Lee has rebuffed these unsolicited offers because he believes that taking in investor cash too soon is the fastest way to kill a company.
"I'm a huge believer in startups having a very narrow focus," said Lee. "Having a lot of money is counter to that. If you have a lot of money, you're tempted to do more and there's more room for mistakes."
The best option, says Lee, is to start out on a precise, laser-focused mission. If you need to raise money, go for the most modest amount you can possibly take.
"Constraining the amount of money you have forces you to be narrowly focused," he said."You'll have a team of ten people solving just one problem, rather than a team of ten people solving three problems."
Less money also means that you might bring in better talent, Lee suggests.
"You're more likely to attract a highly dedicated, passionate team with less funding," said Lee. "Employees are less likely to take the same risks if they join a well-established company. At the early stage, when you're not funded, they believe in a cause that's bigger than earning a paycheck."
Lee, who sold his previous company Unica Corp for nearly $500 million to IBM in 2010, realizes that with Allego, he's in a coveted position. Founding a new company usually goes either one of two ways - either everyone wants a slice of the pie, or no one does.
"There's a bipolar situation in venture capital where either you have a team of people that everyone wants to fund, or a company that nobody wants to fund," said Lee. "If you're in a good situation, you shouldn't be thinking about how much money you can raise or how your valuation will be, but thinking of firms that can help your company in a strategic way."
Lee cautions that entrepreneurs should carefully consider each investment they receive. While the fiduciary endorsement of an established venture capital firm is compelling, Lee says the money is saddled with a newfound obligation: Making those investors money.
"Any dollar you get from a venture firm starts off their stopwatch," said Lee. "They want their money back in three to five years. The moment you raise money, an artificial timeline kicks off."
After constantly saying no, Lee has finally accepted a venture firm's offer. This month, Allego accepted a modest $7.5 million in funding in a round led by General Catalyst.
But Lee's plans for the General Catalysts investment are counterintuitive: He doesn't plan to use the money.
"Most likely, we're not going to touch the money we raised," said Lee. "It's going to sit on our balance sheet."
Lee says his decision to partner with General Catalyst was largely based on the firm's connections.
"General Catalyst helps us open the market," said Lee. "We're still in the very early innings, and we need them to evangelize. If this is a baseball game, we haven't even sung the national anthem yet. The investment isn't about the money. It's about the market."