Joost: Sometimes Too Much Money Is a Curse, Not a Blessing

I am not going to rehash Om Malik's excellent summary of "What went wrong with Joost" but I did want to dive deeper into a few points. As I have always said, raising too much money can be a curse and not a blessing. Here is an excerpt from my post in 2006:

Trust me, I love having well capitalized companies. However, having too much money can be a curse, not a blessing. More often than not, I see management lose financial discipline and avoid making hard decisions when capital is abundant and not scarce. To many executives, money does solve all problems. And yes, having money allows an entrepreneur to do many things with his business like hire more talent, scale the back-end infrastructure, and ramp up sales and marketing. On the other hand, when an entrepreneur has too much money, the tendency is to throw more money to fix a problem. Sales are not ramping up quickly enough so let's hire more sales people. Marketing is not generating enough leads so let's spend more money on lead generation. Engineering keeps missing its product release date so let's hire more engineers. And what happens is that more money gets poured in and that only exacerbates the problem as management never really spends the time to dig deep to understand what the underlying issue is and to fix it at the source rather than layer on more resources. In other words, an entrepreneur only hastens his downward spiral by spending more money on an inefficient business strategy.

This to me can kill a company before it even gets off of the ground. Expectations are too high too early, companies will ramp up too quickly, and any misstep is seen as a failure. Secondly, companies that have too much capital usually try to do too many things and lack focus. It sounds like Joost was building a client, negotiating with media partners, and building out its own ad serving technology and had its own ad sales staff. It sure sounds like a big operation.

Another point to add is that companies founded and led by rockstar entrepreneurs are not enough to drive success. Rock star founders and CEOs will definitely open a ton of doors and drive lots of media attention, but the company still has to execute. In addition, you want your rock star driving much of the execution rather than hiring a huge staff with layers of bureaucracy. Many of these famous entrepreneurs will typically have their hands in a number of different projects at once.

Finally, having been successful before, you really need to assess how hungry these rock stars are for success. Hunger and passion do play a huge role in driving company DNA and creating a winner. I have had just as much success funding entrepreneurs who have had modest wins but were still seeking the big exit. Bottom line is that Joost had a ton of promise but may have been better served by raising much less money at the start and staying highly focused on the task at hand with a much leaner operation.

Comments

[Graham and Dodd Investor]

That's not the Joost van Slooten, accused of drowning Natalie Holloway, is it?

2009 Jul 02 02:11 PM

[rajsekar]

Ed and Om Malik missed an important failure in this autopsy report. One of the main reasons (atleast # 1) for Joost's collapse is the lack of focus from Mike Volpi. Mike has been called a rock star by media and analysts because of his management and digestion of many small startups into Cisco. There again the vision and focus came from John Chambers and not Volpi. Volpi could successfully operate within Cisco's walled garden and create wonders, but he failed once he was left to himself. That's not creativity or having focus. There are many such loose cannons loitering Sand Hills Road looking for openings to create a Google or Sun (oops bad choice). The best analysis will be to compare Joost and Hulu. A focussed and smart CEO can do wonders for a startup company. Joost should have hired a Chief who knew the technology foremost and the ability to execute the plan. Mike Volpi lacked both traits and here we are with an autopsy report.

2009 Jul 02 02:31 PM

[Moon Kil Woong]

rijsekar: You are right on the dot with that. Too bad too many investors listen to VCs and corporate finance teams with over 90% of the junk they peddle turning out bad from the start. Google was successful because Stanford incubated it more than VCs and corporate finance's efforts.

As for Cisco, were it not for its giant monopoly-like presence and cash hoard to buy up all newcomers it would have succuumbed to its bloated bureaucracy long ago. Like a vampire, it needs a constant stream of fresh blood in the form of promising technology and start ups to feed its distribution channel. I would expect anything coming out of Cisco to be nothing but bad blood.

2009 Jul 03 01:32 AM

[Ed Sim]

Rjeskar-i believe i covered the lack of focus above-i could have written more

"Secondly, companies that have too much capital usually try to do too many things and lack focus. It sounds like Joost was building a client, negotiating with media partners, and building out its own ad serving technology and had its own ad sales staff. It sure sounds like a big operation."

2009 Jul 03 07:39 AM

[ed233]

I think there are too many small businesses in America that are under funded and have no ability to obtain credit. That's the real generator for employment. Why concentrate on some lone smut with too much funding. It's the lack of funding for small businesses that matters right now. LOL Looking after your money.

2009 Jul 04 01:28 AM

[derryl]

Unless you get really lucky, sustainable business growth is slow and sefl-correcting. You start to develop in one direction and discover the unforeseen perils there, then stand back and do a cost-benefit on whether it's worth proceeding. If not you pull back and seek other directions for growth or you simply stand pat and try to enhance the profitability of your present operations. Dumping a ton of money onto a business ensures that the exploratory moves will reach faster and further than they should and lose more money than was necessary.

2009 Jul 04 09:47 AM