For many founders in the startup community, a “founder-friendly” investor is one who remains relatively aloof. They cut the check and then watch the executive team run their business without engaging in the day-to-day operations.
In 2021, investors exaggerated a version of “founder-friendly” capital that saw founders continually raise capital and achieve record valuations, without input from their investors. In turn, companies across the board lacked the balance brought by additional broad investor guidance. Today, it’s clear that many companies could have used that guidance, as FTX is just our latest and most high-profile example.
Given new economic headwinds, it’s time for the startup community to redefine what “founder-friendly” capital means and balance both the source and cost of that capital. That means choosing between active and passive partners.
Some founders may feel confident in their ability to execute on their vision, but most will benefit from investors who can share scaling best practices they’ve seen at companies and who know how to navigate recessions. Successful companies are created when investors and executives combine their expertise to look around the corner, not when one side overpowers the other in silence.
Here are some key considerations for founders looking to better balance capital and outside expertise for their business:
In fact, the fact that debt has to be repaid is a sign that the company’s underlying financials are strong enough to support the repayment.
Factor in founder friendliness
The two most important elements that determine your company’s growth needs are the stage your company is in and what you are willing to pay for active investors.
In the earliest stages, when your company is still in R&D and not yet generating revenue, it is nearly impossible to secure passive capital in the form of revenue-based financing or debt financing vehicles. Instead, you raise funds based on your idea, total addressable market (TAM), and the team’s experience.
If you turn to a more passive equity investor at this stage, you are likely missing out on a true champion for your vision who can validate and evangelize your case to future investors. This approach can limit your company’s growth potential and valuations, so you should always choose an active capital partner at this stage.
When you’ve grown enough to start scaling, you can choose between expertise and cost. If you want best practices for growing a business through new products or markets, active investors can provide a broader view of the market. This expertise is immensely valuable and founders who need it must be willing to pay for it with equity.
That said, if you’re confident you can scale the business, you can look around to combine debt and equity investments to minimize dilution and take advantage of outside expertise if needed.
Established or pre-IPO stage companies are better candidates for passive capital from lenders or hands-off equity investors. At this stage, companies are already generating significant revenue and have a plan to become profitable, if they haven’t already. Having a proven track record makes these companies more attractive targets for institutional investors with less domain expertise but significant resources to deploy in the form of debt or equity.