I just got off the phone with an entrepreneur seed-funded by a venture capital (VC) firm four months ago. He has spent all money he raised and is unable to raise the next round. He called me for advice on what to do. I told him the same thing I had told him before he raised VC money. I failed to reason with him then and I didn’t manage to convince him today. Entrepreneurs seem to be addicted to the drug of funding. They are resisting rehab even while on their death beds.

Four months ago, a few angel investors met the entrepreneur. This young IITian had learnt the ropes at one of India’s darling unicorns, then left with his co-workers to start a company in a promising market space. The angels agreed that the product and business were in their infancy, and needed to be developed in a small and controlled environment before going prime-time.

The start-up needed to develop a product that uniquely satisfied the customers’ needs and demonstrated a strong market pull (product-market fit). Until that happened, order volumes were irrelevant. The angels considered investing a couple of crores at a couple of million pre-money valuation to help the start-up get there.

Lo and behold, within 24 hours, a VC firm intervened and offered twice the money at 40% higher valuation. Apparently, this was a start-up in a market space that was about to get hot. Think grocery delivery, food-ordering app, hyperlocal logistics, household services marketplace, etc. It made sense for the VC to enter early and take a wholesome bite into a promising market space that was gathering momentum. For a fund size of over $100 million, it makes sense to spend south of a million dollars on a lottery ticket bundled with an insurance plan protecting it from future regret.

The firm agreed that a few angels could stay in the deal and I got to stay. An associate from the VC firm joined the board because the deal was too small for a partner to spend time on it just yet. VCs typically invest when the company has achieved product-market fit and is scaling up volumes. The associate treated this investment no differently and encouraged the company to quickly scale up volumes so the company could raise its next round ahead of the competitor.

To my surprise, the idea appealed to the competitive entrepreneur. It was obvious to him that following the VC’s lead was the right thing to do. Besides, the seduction of larger funding was too hard to resist. The same entrepreneur who valued strategic inputs from experts a week ago was now focused on the race to win against competitors by doing the same things as them. It was a race to win through speed of building capacity and undercutting price, rather than product differentiation and technology innovation. The winner was measured on one key metric—daily orders.

Fast forward four months. Two companies in this space got so-called series A funding from VCs and are about to get a series B from global funds. This entrepreneur’s company is not one of them. The other companies are making deeper losses per order, and the additional funding ensures they can afford even deeper losses at an even larger scale.

The entrepreneur called the VC that had given him seed funding and the VC said it did not want to participate further in this money losing game. The consortium of funds that VCs feed deals to had already aligned with the other two. The entrepreneur called the angels asking for their advice. Yet again, the angels said product and business are in their infancy, and need to be developed in a small and controlled environment.

We asked him to let go of loss-making customers and withdraw business guarantees to suppliers. This way, the business would focus on those customers and suppliers who valued the product. Everything else was fake business purchased with VC money only to raise more VC money. Instead, the entrepreneur wanted advice on funding and exit options—sell to the two funded companies, tie up with the number three player by volume and make a bid for a third company getting funded.

This is the not the only entrepreneur who has called this week with the predicament of sell or die. This is not the only company in a crowded space that is about to die because they are doing the same thing as dozens of other companies and have run out of investor money to keep the party going.

I have spoken with entrepreneurs in four such companies this week. Each of them are seed-funded by a VC or have angels who are founders and angels in Indian unicorns. Each of them is in a different market space but with one thing in common—the leader in the space is losing an insane amount of money on every order and raising tens of millions of dollars in follow-on funding.

Young competitive entrepreneurs are getting hooked to funding as a drug. Sooner or later, they will face the consequences of their addiction and live with the blame. Do we have to wait for the effects of mass addiction to play out before we stop peddling drugs? Isn’t it time for entrepreneurs to start fixing their habit instead of chasing the next fix? Is it so hard for entrepreneurs to comprehend that raising money from VCs or global funds too soon might actually be a bad thing? More companies die of indigestion than starvation. Pouring a mug of water on a sprouting seedling is going to kill it.

Kashyap Deorah is the author of upcoming book The Golden Tap, the inside story of hyper-funded Indian startups. He is a serial entrepreneur who has spent the past 15 years in India and Silicon Valley. During this time he has started and sold three companies. He is also an angel investor in over 20 companies in India and Silicon Valley. Deorah founded Chalo, a payments app which was acquired by OpenTable in 2013. Prior to that he founded Chaupaati, a phone commerce marketplace, sold to Future Group in 2010. He served Future Bazaar as president for nearly two years. He tweets at @righthalf.

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