Too Much Capital or Less Capital, that is the Question

There are so many entrepreneurs and founders who believe that injecting more capital means more success, but this is simply not true. The race to raising more capital leads to greed, which doesn’t end well if you don’t have a direction.

On the other hand, if your focus is to get less capital, not only does it make you rich as an entrepreneur, but it also enables your business to grow. The most prominent example of this case is of Zappos and Wayfair.

Importance of Being Capital Efficient

Everyone in the VC world is aware of the success experienced by Zappos. They secured investment from some of the best venture capitalists in the market and made it big with an unorthodox approach. The company was later sold to Amazon in a deal between $850 million and $1.2 billion, wherein, the founder secured $214 to $367 million.

An even better example of e-commerce success was laid out by Wayfair. It was a brainchild of Steve Conine and Niraj Shah. Instead of raising external capital, they bootstrapped their idea and turned it into a successful business. They purchased a large number of SEO friendly URLs, generated huge traffic, and optimized against Google’s algorithms. It started generating money right from the beginning and despite many offers from venture capitalists, they refused all offers until they reached $500 million revenue.

In 2014, Wayfair went for its initial public offering (IPO) on the New York Stock Exchange. In fact, each of its partners made as much as all the shareholders of Zappos made. The secret to their success was a capital efficient business. They only raised money from the outside when their firm had become valuable.

The co-founder of Wayfair made 10 times more than the founder of Zappos.

Limit Raising Capital in the Beginning

Although, some might associate the Wayfair’s success to the size of the furniture market, yet, shoe market is basically a better fit given low shipping cost, repetitive customers, etc.

There is no doubt that industry dynamics also contributes to the company’s success, but Wayfair made it big by employing an effective capital strategy. They did not raise any capital at the beginning, nor did they ask for it to speed up the early growth despite having offers from venture capitalists.

The only time they went for external capital was when they wanted to expand on a massive scale. They did not hesitate to take a huge amount of money and gathered three times higher than what Zappos did. However, they went for it only when the business had established its name, had minimum dilution, and could generate huge profits.

Why Should You Secure Money Later rather than Sooner?

This is one of the most important question. From the two scenarios above, it is obvious that Wayfair made much more money as compared to Zappos. Tony Hsieh, the founder of Zappos, said that he sold the company to Amazon due to the pressure imposed by its shareholders. Despite making a lot of money, giving in to the financial decisions made years ago was quite frustrating. Hsieh might have made it as big as Wayfair did, if he had more control over the decisionmaking process.

At the time of the IPO, Wayfair founders owned over 50 percent of the business and had managed to raise capital on their own terms with very little dilution. This enabled them to exercise more control over the financial decisions, which is also reflected in the success.

Overcapitalization Leads to Limited Optionality

When it comes to taking a financial decision, overcapitalized businesses usually end up with two choices:

• Take millions of dollars in investment and fail
• Make money for venture capitalists or go bankrupt and fire your entire team

But Wayfair, on the other hand, made a lot of money due to the lean financing strategies of their founders. It also enabled them to retain their right of Optionality. This gave them a choice to sell on the basis of their risk appetite or business performance, and not based on their capital structure. Just because you have become a multi-million dollar startup, doesn’t mean you should not raise money down the line.

It is important to understand that raising too much capital has its downsides. Therefore, efficient decision making should be employed to be able to spend your money wisely.