The Capital Delusion

The train of though goes something like this: the only barrier standing in the way of all these great businesses being formed is scarcity of capital. If only a way can be found to overcome this obstacle, it would be all Nirvana and the world would not be deprived of all these great ideas which will usher in a new era.

Two fallacies are embed in this line of thinking. The first being that capital can be magically made abundant and the second being that businesses having access to capital guarantees success.

Just as defines the relationship between humans and any economic good (a good which is in less abundance relative to human wants), capital is inherently scarce. There can never be enough capital available to fund all ideas and projects at any one time in society. Society has to ration capital and make sure it gets to those who can put it to the most productive and value added use. The means for achieving this end is  the market economy and its price mechanism system (i.e. profit and loss calculations). But I’ll also add that many times when capital is distributed, considerations of efficiency don’t always win out and things are not very straight forward.

No matter how great a business idea might appear and sound when in business plan format, success is not guaranteed. Such plans are riddled with many assumptions and simplifications which fall apart like a deck of cards upon contact with reality. Stories abound of business and startups which had abundant access to capital and all seemed like they were about to conquer the world but burnt through their capital and failed spectacularly.

Capital can be a double edged sword. It can be a blessing and it can be curse. With capital, startups and companies can hire world class talent and scale up on a level and speed which would simply be difficult or next to impossible using means such as bootstrapping. But capital can also be a curse because with an infusion of capital,  incentive structure within startups and companies can change overnight. Rather than operating on the side of caution and rigor, overnight not too well thought out decision making can become the norm.  In a way, an artificial glut of capital in society can have the perverse effect of degrading the quality of entrepreneurs around.

All startup and business ideas are unique. But in the early stages, its wise to say that the focus should be on operating an the lowest cost possible and seeing if an actual demand exist for such business ideas. What many people fail to appreciate is how ridiculously low the bar for those who had ideas and want to test them. Depending on the funding method used (for this blog, I mostly have venture capital in mind), emphasis should be put on doing all that is possible not give away chunks of the business. In giving away equity, the stage could be set for a coup being carried out against the founder(s) by investors.