A founder friendly investor is one who stays hands off. After cutting the check, they watch the executive team run their business.
The investors overdid a version of founder-friendly capital that boiled down to founders continually raising capital and reaching record valuations. The companies missed out on the balance brought by investors. It is clear that many companies could have used that guidance, seeing as FTX is our most well-known example.
It is time for the startup community to find a balance between the source and cost of capital. The choice is between active and passive partners.
Some founders may be confident in their ability to execute on their vision, but most will benefit from investors who can share scaling best practices they have seen across companies. When investors and executives blend their expertise to see around corners, successful companies are born.
A better balance of capital and external expertise is important for founders.
The fact that debt capital must be paid back is actually a sign that the company’s underlying financials are strong enough to support repayment.
Your company's stage and what you're willing to pay for active investors are the most important factors in determining your company's growth needs.
It is almost impossible to secure passive capital in the form of revenue-based financing or debt financing vehicles when your company is still doing R&D. The funds will be raised on the strength of your idea, total addressable market and team's experience.
If you turn to a more passive equity investor at this time, you will miss out on a true champion for your vision who can validate and evangelize your cause to future investors. You should always choose an active capital partner at this stage if you want to limit your company's growth potential and valuations.
It is possible to choose between expertise and cost when you are ready to scale. Active investors can give you a better view of the market if you want to grow a company through new products. This expertise is worth a lot and should be paid for with equity.
If you are confident in your ability to scale the company, you can mix debt and equity investments to minimize the amount of dilution.
Pre-IPO stage companies are more suited for passive capital than established companies. Companies are generating revenue and have a plan to make money if they haven't already. With a proven record of success, these businesses are more attractive targets for institutional investors with less domain expertise but more funds to deploy in the form of debt or equity.