Not All Capital is Created Equal

When you are raising your first fund or raising your Seed round, without question, the most strategic investor is the one willing to write the check. I realize that statement is meant to be funny, but sadly, in many cases it is true. Getting the first fund or seed round done is tough. No one likes doing it. But hopefully you have surrounded yourself with a good supportive ecosystem to help you through the process.

However, if I could give GPs and CEOs one strong piece of advice it would be to approach your second fund or subsequent rounds in a much (much) more intentional manner. This one tactic can give a tremendous boost to your business.

Forget the ‘Dumb Money’ - Seek Smart Strategic Partners

Trust me, I know that, for some, this sounds ridiculously obvious. But I am telling you, I am constantly surprised at how many groups don’t do this properly. Investing alongside partners with domain expertise is ALWAYS a positive.

Just so that I am not misunderstood, I want to be clear on what I mean by ‘dumb money’. This is a common (although not particularly flattering) term used in capital markets for investors that do not have domain expertise. No, it does not mean that the investor is actually ‘dumb’. Quite the opposite. It just means that the investor is not familiar with the industry or domain, and is fully relying on the ability of the management team to execute. The investment is often made as a matter of ‘trust’ for the CEO or management team, not necessarily on the technical merits of the business. Oftentimes these investors are wealthy angels, family offices, or non-traditional private equity or venture capital syndicates.

Don’t get me wrong, I understand the lure of this type of capital. A CEO or management team has strong conviction in their ability to execute on a business plan, and just wants the capital to make it happen. The idea is that the capital comes with less strings attached (vs. traditional private equity or venture capital partners), often times at better economic terms to the company, and the investors tend to leave the management team alone. All of that sounds great. What’s not to love? Right?

To Succeed, You Need More than Just Capital

Well, actually, there is a lot not to love about these arrangements. Yes, the terms may be more beneficial to you. However, when your fund or business runs into a tough patch - and IT WILL - the ‘dumb money’ will often be just that. When you need to tap into the Board or the Cap Table for strategic advice and strategy - it is no where to be found. And as far as the investors leaving the management team alone to run the business? Many times that is a fallacy. The opposite can actually happen. The management team can be constantly holding the hands and educating investors along the way. What seemed like a great deal can quickly turn into an unfortunate time suck.

Your fund and business needs more than just capital. It needs knowledge. It needs expertise. As Ashmeet Sidana, Partner at venture capital firm Engineering Capital correctly points out “Founders who recognize that all money is not equal — different firms bring different value — will benefit if they choose their investor partners keeping this in mind. They will also benefit because such focused firms and teams will bring more value than just money to them (Why Venture Capital is No Longer a Life Cycle Business).”

All growth-stage companies (and I mean all of them) eventually run into challenges. That is the nature of that stage of growth. The market can shift, business models need to pivot, companies can suffer through growing pains, and countless other problems can arise. CEOs need solid team members on their bench. They need to be able to lean on strategic investors to help navigate rough waters.

If You Don’t Know How - Get Some Help

I also realize that this is one of those ‘great’ pieces of advice that is easy to give, much harder to execute on. And it is. For entrepreneurs and founders, filtering the noise to find capital partners aligned with their core strengths is difficult. However, it is far less difficult to put the work in to get smart capital partners than it is trying to get that strategic help without that expertise on your cap table.

If you are a GP team or a CEO, give yourself this quick win. Put the time into researching and getting in front of potential strategic partners. The good news is that the pool of potential strategic partners has increased. The bad news is that it might take more effort to connect with those partners. Traditionally, raising capital has been a (very) lonely road for CEOs. However, the eco-system has changed - don’t be afraid to get a little help.

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