No two capital sources are created equal. Like the deals they fund, capital types and capital providers have very different incentives, motives and structures. As any good financier knows, debt behaves very differently from equity and other mixed-bag securities (e.g. mezzanine funding). Furthermore, the stage and type of the business will attract different capital providers. The spectrum ranges from early stage venture capital through very late stage private equity. The company stage and investment need can sometimes create desperate situations for entrepreneurs. Unfortunately, when companies get desperate for capital, they will often submit to usurious rates or other forms of extremely toxic financing. In such cases, the financing tail can wag the corporate dog.
Solid companies that create a true market through running an investment banking process will ultimately have their pick of various quantitative terms important to closing a quality transaction. But, what of the other soft metrics? Capital is much more than just a senior debt rate, a note or a sliver of equity. Every legally-binding investor contract includes investors (which in this case means people and personalities) behind the paper.
Playing Culture-Matching Craps
While most larger, institutional investment firms operate at a level of sophistication and professionalism that creates a somewhat predictable culture, culture wildcards exist nonetheless. Avoiding a round at the culture craps table is nearly impossible if you attempt to source capital from alternative means (crowdfunding is especially egregious here). Having a trusted capital advisor with direct experience with a particular lender or investor, can help issuers and entrepreneurs avoid the pitfalls inherent in yoking oneself into an undesirable situation. Some bad situations are unavoidable without the hard-knock lessons of hindsight.
Here are a few questions to ask yourself when weighing the extremely varied financing options that exist:
As in many cases, the key to obtaining the best terms on your capital transaction–regardless of the deal structure or deal type–is creating a market. Doing so requires access to a large data-set of potential acquirers, buyers and investors. It also requires a great deal of hustle on the part of the dealmaker, whether internal to the company or hired as a buy-side investment banker. Creating a market for the deal in question can create multiple options for the issuer which breeds an environment that puts the power back in the hands of the business owner–which is where it always should be.