Some Investors Are Worth More Than Others

Companies are always in need of sources of cash to fund their businesses.  In the early stages Entrepreneurs, and their friends and family tend to be the first financiers; using their own cash and often working for free to get the company going. This investment, indeed, should be measured, for the founding team, who may not only have invested their cash and intellectual property, but might have also donated many hours of their time, when they might have been paid elsewhere.  

This initial investment is generally followed by wealthy individuals from local communities, and later by Fund-less Sponsors, Venture Capital Firms and Business Development Companies (BDCs), who are generally the first to pool investors’ cash to invest into the Entrepreneur’s early or growth stage businesses.  At every stage, folks invest because of the perceived or expected growth potential of the company…obviously with the hope that the earlier they “get in” the greater the upside potential.  After the early stage investors, comes private equity hedge funds, closed-end, mezzanine and special purpose funds and then bank financing, followed by investment banks, with access to the public stock markets and retail and institutional investors.    

Unimpeded access to every stage of funding is critically important to the success of any company. As each of the funding stages pass, they typically move from the highest risk (and potentially highest returns) for the earliest investors, to risk profiles supposedly decreasing as the company becomes more and more financially stabilized.  While Entrepreneurs, must always keep in mind, that no matter their success and ultimate proof “of what they’ve always known to be true, the investor’s original risk profile, at each funding stage, never decreases.  In fact, it may increase due to opportunity lose, based on the time the investor remains in the investment.

Some investors, nonetheless, may be worth more than others. Often, earlier stage investors, venture capital firms and especially BDC’s, will tend to “roll-up their sleeves” and provide Entrepreneurs with mentoring, managerial & technical expertise, as well as access to business contacts, which are very difficult to account for, in importance, for these special types of investors.  We have found the investors who get involved, providing personal and institutional mentoring services, tend to find ways to accelerate companies, helping them find quicker paths to profitability…hence improving the odds for the company’s success. 

Many early stage investors tend to take equity and debt positions in companies, some of which may require protective covenants, in an effort to protect their investments.  While protective covenants may lay the ground work for acceptable Entrepreneur behavior, it does very little to assist the company to grow.  The Entrepreneurs who find a way to enhance their management teams or boards of directors, with a distinguished class of investors, capable of supplementing their investments with additional business consulting and assistance, have proven, time and again, they grow their companies, much more rapidly.

This is why Congress enacted, within the rules for BDCs, the requirements for them to provide “significant managerial assistance”.  BDCs are legally bound, within their charter, to satisfy a “Mentoring Mandate”.  For Entrepreneurs who partner with BDCs, they know they get access to vital sources of early to growth stage financing but also recognize that the cash infusion comes with the added benefit of the BDC providing structured and institutionalized business consulting assistance, which is necessary to improve both the BDC and the Company’s financial results. 

Entrepreneurs must then help their earliest investors realize a return on their investment, commiserate with the investment stage and the faith each investors showed in their company. But, should welcome and give the proper recognition for the amount of time, energy and effort, which is pledged to their company, by the special investor types, who are willing to take on the added responsibility of providing business guidance and mentorship to their Company.

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