Derek, great question. I think a lot of entrepreneurs make this mistake, yet just about none of them get the correct guidance as to how to handle this situation. I feel it’s ok to spend amount of capital on your prototype IF you’ve done the market research.
However, you need to impose a very strict budget in the beginning. That’s why it’s critical to set MINIMUM VIABLE GOALS not vague interpretations of what success is.
In your example – what seems to be a social product – and the collaboration/reading of other users contributions to your project – its a blend of micro goals around USERSHIP + MONETIZATION.
YOU NEED TO MONETIZE. YOU NEED USERS OUT OF THE GATES. What metric would show you that value? Paying users per 1000 sign ups?