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INNOVATION BEAT

Boston startups: ‘Don’t get high’ on all that cash

Eric Paley, managing partner at Founder Collective.Noah Kalina

Look around Boston, and you’ll find plenty of startups raising millions of dollars.

When it comes to cash for entrepreneurs, this year has been one for the history books. As of September, 815 startups in Massachusetts had raised venture capital. Together, they account for roughly $23.7 billion in funding, already surpassing the $16.9 billion raised in 2020 (and an all-time record), data from PitchBook-NVCA Venture Monitor shows.

But all that money begs the question: How much is too much? Where’s all this cash going? And is this boom time going to continue in 2022?

To answer this, I hopped on a Zoom call with Eric Paley, a managing partner of Founder Collective, a Cambridge-based venture capital firm, and Joseph Flaherty, the company’s director of community and content. (Founder Collective invests in tech startups and was an early backer of companies like Uber, PillPack, and Whoop.)

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The duo doled out some wisdom, and tough love, for Boston startups that might be hoping for the next eye-popping funding round that garners headlines and accolades. “Don’t get high on the capital,” Paley said. “The capital is not validating your business. Focus on what your customers are saying and the actual results of your business.”

In their view, many venture capitalists have access to cheap money, and are doling out too much cash to startups, not worried about the consequences it can have.“A lot of VCs are giving steroids to babies in the hope that they will become Olympians,” Flaherty said. “It’s just a fundamentally amoral, if nothing else, way to kind of approach this kind of stuff.”

For many startups, coming into millions — maybe hundreds of millions at once — can be exciting, they said, but figuring how to spend it can lead to undisciplined, and disastrous, decisions. “It’s building products and features that, very often, people don’t care about,” Paley said. “[It’s] building huge engineering teams that become less and less efficient; spending a fortune on sales and marketing that has a negative yield.”

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Instead of chasing cash, companies should build methodically, responding to customer feedback, and scaling at a reasonable pace, they said. “You can’t build a $100 million dollar revenue company without building a $10 million revenue company,” Paley added. “Have the right amount of capital, but don’t start making poor decisions because you’re trying to live up to something you’re not yet.”

At the same time, their in-house data shows startups don’t necessarily need hundreds of millions in venture funding to become billion-dollar companies. In an analysis of 166 technology companies that went public over the last decade, the firm found 10 raised less than $20 million, 31 raised less than $50 million, and 73 raised less than $100 million. (It’s worth keeping an eye on companies like Snyk, Devoted Health, and Whoop, which have raised hundreds of millions and have been hiring aggressively.)

“It’s so easy to get caught up in the hype of people whispering in your ear that ‘you’re the greatest thing,’” Flaherty said. “At the end of the day ... keep your funding in line with your fundamentals, and you can do amazing things.”

Looking ahead, it’s quite unclear if 2022 will bring more of the same in terms of funding, they said. Inflation might cause interest rates to rise, stifling investors’ appetite to spread money around. There are also signs of tightening in the stock market, Paley said, which can be a leading indicator for what private financing markets, such as venture capital and private equity funding, will experience.

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“This type of situation doesn’t last forever,” Paley said.