My Competitor Got Funded — Am I Screwed?

TL;DR: "Oh Sh*t!! My competitor just raised a bunch of funding to do exactly what we're doing. We're done for, right? How can we possibly compete with someone who now has the resources to do all of the things we wished we could do?"

Yes, a competitor just raised some funding. No, it probably doesn't matter.

"Wait, what? How could my competitor raising money be anything but my own personal Armageddon?"

Well, it turns out that when the pixie dust settles after those big announcements, our competitors often have a whole new bag of problems to deal with that we don't. We need to look past the upside of that new capital to understand how most funded startups actually sink themselves with an anchor of funding.

All Fat and Bloated

The very first thing a newly funded company will invariably do is spend like they won the lottery. They'll hire tons of people all at once (which begs for inefficiency), they'll set money on fire in marketing campaigns, and they'll put off profit-making incentives until later.

While they are burying themselves in liabilities, their arms are getting tired from all the high fives of praise they are getting for doing it. Anyone who even suggests, "Hey, maybe we should stockpile this cash and spend it wisely," is run out of the room as a heretic. Also, that poor bastard will be the first person to leave long before anyone else realizes the party is over.

So, while today it feels like they are getting all of the resources and attention that we wished we could have, remember that in the background, they are actually weaving a noose they have yet to even feel. That noose is created by mountains of new cash liabilities from payroll to office leases to good old-fashioned debt. It's going to come due — sooner than people realize.

They Have a New Customer — Investors

Ask any veteran startup Founder who has raised a lot of money who was more important - their paying customers or their paying investors — and they will likely tell you the latter, and not be happy about it. Once we get on the funding train, we can't get off of it. That's because we always need more of that fresh capital to keep the lights on for all of the liabilities we just racked up.

And so instead of spending all of our time building product, developing the team, and impressing customers, we're busy answering investor emails, updating our pitch deck, and making sure we have "sexy metrics" to raise with.

The amount of distraction that comes with having to play the "appease investors" game is quite literally a full-time job. While we're heads down focusing on serving customers, our most important C-suite competitors are now distracted appeasing investors. Sweet.

Exit Options Go to "Near Zero"

The one part that no one thinks about is that when our competitor gets funded, their options for how they can exit the business shrink significantly. In fact, the more money they raise, the fewer options they have. A startup that raises $20 million isn't going to try to cash out with a $10 million offer. But our startup could take $10 million, and we'd never have to work again.

The broken assumption that we often make is that the market we're heading into is going to have a massive outcome, and only the biggest players will ring that IPO bell. But the reality is that there's a 90% chance there will be no big outcome in our space, and the only people who will actually make any money are those who were either profitable or able to cash out on a small enough figure for it to matter.

We can't let those big announcements and proclamations dissuade us. They are all just camouflage for what really matters which is being able to build a healthy business that endures. Let those competitors have their moment. Savor it. Be the company that plays the long game and actually has something to show for it in the end.

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