Does More Capital = More Productivity For Startups?


If you have spent any time in an entrepreneurial community, you know that bootstrappers wear their labels with pride. I've heard some of them compare angel and VC money to business poison, and others rant and rave about how it leads to fat, bloated budgets, and bad spending decisions. I've never seen any statistics, but everyone seems to have their anecdotal example that they take as gospel. I bring this up because I recently read a paper about allocation and productivity of time in new ventures. The paper found something interesting as a by-product of the research.

The productivity of work time is mainly explained by the amount of start-up capital (StartCapital), i.e., investing larger sums of money in the business leads to higher productivity per working hour.

Keep in mind that this doesn't say capital leads to long-term success – just that it leads to higher productivity. I won't assume that correlates to success because people could be extremely productive at irrelevant things. But it does make me wonder about the correlation of capital to success.

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My guess is that boostrapping fails quite a bit. People run out of time and money. Other aspects of life rise up in importance. The day job gets busier. And when all that happens, the bootstrapped startup gets pushed aside. Taking investment money makes you more committed because it increases the consequences of giving up. Some articles have even pointed out that photo search startup Riya could only change it's business model because the money gave them time to do so. Of course, others will disagree.

I believe that money makes startups more productive. There is much to be said for the ability to focus on working as opposed to raising more money or fighting problems that arise from understaffing. And good managers will still be cost conscious with larger budgets.

I heard someone say that capital is an amplifier, and that's probably right. If you are doing the right things, it will lift you to the next level. If you are doing dumb things, it will speed up the train wreck.