for many founders In the startup community, a “founder-friendly” investor is one who is relatively uninterfering. They write the check and then watch management run the business without getting involved in day-to-day operations.
In 2021, investors overdone their version of “founder-friendly” capital. That is, the founders continually raised capital, reached record valuations, and received no input from investors. As a result, the company as a whole has missed the balance brought about by the complementary broad guidance of investors. FTX is just the latest and best-known example today, so it’s clear that many companies could have used that guidance.
Given new economic headwinds, the startup community needs to redefine what “founder-friendly” capital means and balance the sources and costs of that capital. That means choosing between active and passive partners.
While some founders may be confident in their ability to execute on their vision, most founders are able to share scaling best practices they’ve seen across the enterprise and know how to weather the recession. You will benefit from investors who know. Successful companies are created when investors and management team combine their expertise and turn a corner. Not when one overwhelms the other and stays silent.
There are some key considerations for founders seeking a better balance of capital and outside expertise for their business.
The fact that debt equity must be repaid actually indicates that the underlying financials of the company are strong enough to support the repayment.
Consider the friendliness of the founder
The two most important factors that determine a company’s growth needs are the company’s stage and the amount it is willing to pay active investors.
Securing passive capital in the form of revenue-based or debt financing is nearly impossible in the early stages when a company is still in R&D and not yet profitable. Instead, we raise funding based on the strength of the idea, the Total Addressable Market (TAM), and the experience of our team.
Relying on more passive equity investors at this stage can miss out on the true champions of your vision who can validate and evangelize your purpose to prospective investors. Active capital partners should always be selected at this stage as they may limit the growth potential and valuation of the company.
Once you’re grown enough to start scaling, you can choose between expertise and cost. Active investors provide a broader view of the market when you need best practices to grow your company through new products and markets. This expertise is highly valuable and founders who need it should be willing to pay for it in equity.
That said, if you are confident in your ability to expand your company, you can combine debt and equity investments to minimize dilution, drawing on outside expertise as needed.
Established or pre-IPO stage companies are better candidates for passive capital from lenders or unleashed equity investors. At this stage, the company is already making a significant amount of money and has plans to make it, if not yet. Having a proven track record of success makes these businesses a more attractive target for institutional investors with less domain expertise but large amounts of capital to deploy in the form of debt or equity.
