Investor Money is Subjected to "Stupid Tax"

One of the biggest questions that many young entrepreneurs often ponder is whether or not to seek investor funding. While there are certainly advantages, investors can also pose a threat to the discipline needed to build a successful company. Recently, I had a conversation with my friend Piet Jan De Bruin about this very topic. He argued that, while "money is money," there is a significant difference between investor money and founder money. In this blog post, I aim to explore his argument and dive deeper into the possible ramifications of each.

Piet Jan De Bruin argued that investor money is more subject to what he called "stupid tax." He explained that investors tend to buy more things, hire more people, and are willing to take bigger risks than if they didn't have investor money. This can be a detriment to the company, especially in the early stages when the founder should be focused on finding product-market fit. In these cases, the extra expenses incurred by investor money may not be additive to the company.

Extra funding may distract the founder from essential tasks such as customer discovery and perfecting product-market fit. In other words, if the founder were operating with just their money, there would be more discipline in spending, as they would focus on the essentials rather than the big picture.

This presents a significant challenge for companies that have received significant investment. For example, a $5M dollar seed investment may sound like a fantastic opportunity, but it could potentially cause more distractions than benefits. In these cases, companies may find themselves spending more time managing the funding instead of focusing on what's essential. (P.S $5M was the average seed check for most developed venture markets in 2020-2021).

It's important to note that this isn't to say that investor money is all bad. It provides a much-needed cushion in some scenarios and helps companies scale much more quickly than they would otherwise. However, early-stage companies must weigh the potential risks before deciding to seek investment.

Additionally, investors and founders must work together to ensure that funding is spent wisely and productively. This includes striking a balance between investing in growth, maintaining financial discipline, and being laser-focused on finding product-market fit at such an early stage.

In conclusion, the difference between investor money and founder money may not be as significant as one might think. While investor money does provide a much-needed cushion for some companies, it also introduces distractions and a lack of discipline. Ultimately, the key is to strike a balance between discipline and growth while also being laser-focused on finding product-market fit. With careful consideration and planning, entrepreneurs can navigate the complicated world of investor funding and still build successful companies.