How to evaluate the rationality of financing scale using first principles? Why might overfunding paradoxically reduce startup efficiency?

Okay, let's talk about this topic.

First, let's discuss how to analyze "how much money is reasonable to raise" from its roots.

Thinking about this from first principles means stripping away all the jargon and glamour, and returning to the most primitive and fundamental level.

What is the most fundamental aspect of a company? It is an organization that exists to achieve a certain goal (e.g., creating a product, validating a market). Running this organization requires resources, and the primary resource is money.

Therefore, the essence of fundraising is not to "look impressive" or "stockpile ammunition," but to buy time and resources to achieve the next clear milestone.

So, a reasonable fundraising amount can be calculated from scratch as follows:

Reasonable Fundraising Amount = (Monthly Fixed Costs to Sustain the Company + Variable Costs Required to Achieve the Next Goal) x Required Time + Contingency Fund

Let's break it down:

1. Monthly Fixed Costs ("Burn Rate"):

   • Personnel Salaries: This is the largest component. How many engineers, product managers, and sales personnel do you need? How much will you pay them? This can be calculated relatively precisely. For example, a team of 10 people with an average monthly salary of 20,000, would cost 200,000 per month.
   • Office Rent, Utilities, and Miscellaneous Expenses: Office rent, server costs, utilities, internet fees, etc.

2. Variable Costs to Achieve the Next Goal ("Quest Costs"):

   • What is your next "milestone"? Is it to build a product prototype? To acquire the first 1,000 paying users? Or to validate the customer acquisition cost of a certain channel?
   • R&D Costs: If you're developing hardware, there will be mold opening and material costs.
   • Marketing Costs: If you need to acquire users, there will be budgets for advertising and marketing campaigns.
   • These costs are not fixed monthly expenses but are invested to "clear a hurdle" or "reach a new level."

3. Required Time ("Runway Length"):

   • Typically, the goal of a funding round is to sustain the company for 18-24 months. Why this timeframe? Because it gives you enough time to achieve the aforementioned "milestones" and leaves a few months to initiate the next funding round. If you only raise enough money for 6 months, you'd have to start preparing for the next round immediately after closing the current one, which would cause significant anxiety for the team and prevent them from focusing on their work.

4. Contingency Fund ("Health Pack"):

   • Unexpected events always happen. Market shifts, key employee departures, product R&D setbacks... Therefore, adding an extra 15-25% to the total budget as a buffer is highly necessary.

So, when a reliable founder goes fundraising, the ledger in their mind should look like this:

“I need a team of 10 to operate for 18 months, with total salaries of A; server and office costs of B; to acquire 1,000 seed users, I need to invest C in marketing expenses; plus a 20% contingency fund. So, A+B+C+(A+B+C)*20% = the amount I need to raise this round. With this money, in 18 months, my company will reach XXX status (e.g., monthly revenue of XX, or XX daily active users), a state that will be sufficient to support my next, higher-valuation funding round, or achieve self-sustainability.”

You see, with this calculation, every penny of the fundraising amount has a clear purpose and destination. This is thinking based on first principles, not just arbitrarily saying, "I want to raise 20 million."

Now, let's discuss why raising too much money can actually be detrimental.

This might sound counter-intuitive; isn't more money always better? Like going on a hike, it's better to bring too much water than too little, right? But for a startup, that's not necessarily the case. Too much money can be like strapping heavy golden shackles onto a child just learning to walk, leading to several major problems:

1. Loss of Leanness and Focus ("Affluenza")

   • Resource Curse: When you have little money, every penny is spent wisely. You'll try every means to achieve the most with the least amount of money; this "scarcity" forces the team to innovate and find the smartest, most efficient solutions.
   • What happens with too much money? The first reaction to a problem is no longer "how to solve it cleverly," but "how to throw money at it." You start renting luxurious offices, hiring non-essential "vanity" employees, and launching untested large-scale marketing campaigns. The entire company's "muscles" become slack, losing the "hunger" and efficiency necessary to survive in a brutal market.

2. Premature Maturation and False Prosperity ("Force-Fed Pig")

   • There's a critical juncture in entrepreneurship called "Product-Market Fit (PMF)," which means your product is genuinely needed by a group of people who are willing to pay for it or use it consistently.
   • Before finding PMF, a company should operate like a lean special forces team, rapidly iterating and flexibly adjusting.
   • Too much money can create an illusion that you can skip this stage and jump directly into the "scaling" phase. You'll spend vast amounts on advertising and expanding sales teams, attempting to force a product that the market hasn't accepted yet. The result is that you spend a lot of money, acquiring a bunch of "fake users" who won't pay and will quickly churn, creating a seemingly prosperous bubble. Once the spending stops, the data immediately collapses. This is like pouring gasoline on wet wood that hasn't caught fire yet; all you get is choking smoke and nothing else.

3. Increased Difficulty for Subsequent Funding Rounds ("Digging Your Own Grave")

   • Raising money far beyond your current value usually means your company has been given an inflated valuation. While this might seem glorious at the time, it's actually planting a ticking time bomb for yourself.
   • Capital is profit-driven. The next round of investors must see significant growth in your company compared to the previous round to give you a higher valuation. Because your previous valuation was artificially inflated, the growth targets you need to achieve this time become exceptionally difficult.
   • If you fail to meet these inflated targets, you'll have to accept a "Down Round," which is devastating to team morale and will greatly displease early investors, potentially even triggering unfavorable clauses for the founders. You're essentially pushing yourself to the edge of a cliff for the sake of appearances.

4. Dilution of Founder Equity ("Working for Others")

   • Fundraising means giving up company equity. The more money you raise, the more equity you give away. If too much equity is given up in the early stages, the founding team might find that after all their hard work, most of the company no longer belongs to them. This severely impacts the founders' long-term motivation and control.

In summary:

Reasonable fundraising acts as a "booster" for company development; excessive fundraising, however, is more like an "anesthetic." It can mask problems, induce laziness, create bubbles, and cause the company to miss the opportunity to truly find its core value and a path to healthy growth, all while in a false sense of comfort.

An excellent entrepreneur should be like a meticulous traveler, precisely calculating how much water and food are needed for the journey, then traveling light, staying alert and efficient, rather than being a fool exploring the desert with a backpack full of gold bars.