Why money is the fastest way to kill your startup, according to a CEO who sold a company for nearly half a billion dollars
- Yuchun Lee says he turns down or ignores multiple unsolicited offers each week from investors interested in funding his Boston-based software company, Allego.
- Lee says his reason for turning down investors’. Cash is strategic: There are plenty of downsides to taking in too much money too soon.
Yuchun Lee, the founder of the sales software startup , 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,”. Lee told Business Insider in an interview. “I get pinged just about every day &mdash. People sending Federal Express packages to my office, trying to make it seem like I've a fiduciary obligation to talk to them.”
Again and again, Lee has rebuffed these unsolicited offers, he says, 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,”. Lee said. “Having a lot of money is counter to that. If you've a lot of money, you’re tempted to do more and there’s more room for mistakes.”
The best option, Lee says, is to start out on a precise, laser-focused mission. If you need to raise money, go for the most modest amount you can take.
“Constraining the amount of money you've forces you to be narrowly focused,”. He said. “You’ll have a team of 10 people solving just one problem, rather than a team of 10 people solving three problems.”
Lee also says less money could actually help companies get more out of employees.
“You’re more likely to attract a highly dedicated, passionate team with less funding,”. Lee said. “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 a previous company of his, Unica Corp. Nearly $500 million to IBM in 2010, realizes that with Allego he’s in a coveted position. Founding a new company usually goes one of two ways &mdash. Either everyone wants a slice of the pie. No one does.
“There’s a bipolar situation in venture capital where either you've a team of people that everyone wants to fund or a company that nobody wants to fund,”. Lee said. “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 points out that the money is saddled with a newfound obligation: making those investors money.
“Any dollar you get from a venture firm starts off their stopwatch,”. Lee said. “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 Catalyst investment are counterintuitive: He doesn’t plan to use the money.
“Most likely, we’re not going to touch the money we raised,”. Lee said. “It’s going to sit on our balance sheet.”
Lee said his decision to partner with General Catalyst was based largely on the firm’s connections.
“General Catalyst helps us open the market,”. Lee said. “We’re still in the very early innings. 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.”