For many founders In the startup community, a “founder-friendly” investor is relatively hands-off. After they cut the check, they watch the executive team do their job without being involved in the day-to-day operations.
In the year By 2021, investors have passed the “founder-friendly” version of capital, where founders are continuously raising capital and reaching record valuations without any input from their investors. In turn, companies across the board have lost the balance brought about by investors’ corresponding policy breadth. Today, it’s clear that many companies can use that guidance, with FTX being just our latest and most high-profile example.
In light of new economic storms, it’s time for the startup community to redefine what “founder-friendly” capital means, and to adjust the source and cost of capital. This means choosing between passive and active partners.
Some founders may be confident in their ability to execute their vision, but most will benefit from investors who share operational best practices they’ve seen in companies and know how to navigate failure. Successful companies are created when investors and executives combine their expertise to look at angles, not when one side prevails over the other.
Here are some key considerations for founders looking for better capital balance and external expertise for their businesses.
The fact that debt capital must be repaid is a sign that the company’s financial fundamentals are strong enough to support repayment.
The reason is in the friendliness of the founder
The two most important factors that determine your company’s growth needs are the level of your company and what you are willing to pay for active investors.
In the early stages, when your company is still doing R&D and not generating revenue, it may not be possible to secure passive capital in the form of income-based financing or debt financing vehicles. Instead, you capitalize on the strength of your idea, total reachable market (TAM), and team experience.
If you transition to a more passive equity investor at this stage, you may lose a true champion for your vision who can justify and evangelize your cause to prospective investors. You should always choose an active capital partner at this stage as this approach can limit your company’s growth potential and valuation.
If you’re old enough to start scaling, you can choose between career and expense. If you want best practices for growing a company in new products or markets, active investors can provide a broader view of the market. This knowledge is extremely valuable and founders who need it should be willing to pay an equal price.
That said, if you’re confident in your ability to value the company, you can buy it with a mix of debt and equity investments to reduce the leverage, using some outside expertise if needed.
Established or pre-IPO stage companies are better candidates for equity capital than lenders or equity investors. At this stage, companies are already generating significant revenue and have plans to reach profitability if they haven’t already. Having a proven track record of success makes these businesses more attractive targets for institutional investors with a lot of domain knowledge but a lot of cash to deploy in the form of debt or equity.
