The Importance of Synergistic Capital for Early-Stage Companies


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As I was talking to one of my first founders about the principles of corporate governance, I realized that what I was sharing with him was not common knowledge. The founders of the early stages are always “looking for smart capital” here, but I realized that the founders don’t really understand the depth of this statement or why it’s so important to be strategic when it comes to raising capital, especially in the first rounds (pre-seed). , seed and Series A).

Let’s start by changing the phrase “seek smart capital” to “seek synergistic capital.” To crystallize the point of why the search for synergistic capital is so important for early-stage founders, I want to cover some key points of corporate structure and government, as understanding this from this lens will help you see better the importance of the topic. Take a look at the organization chart I created below:

Image Credit: Fredrick D. Scott, FMVA

It’s not the most beautiful organization chart I’ve ever made, but it will illustrate this point well. The most important conclusion from the graph above is to understand how the hierarchy works. Starting at the bottom of the chart and going up:

Suite managers

C-suite executives are considered “day-to-day” managers of the company. They are responsible for overseeing and ensuring that the company and staff operate within the mission and vision, as defined by the board of directors (with input from C-Suite). They ensure that the company is operating, in all aspects, in the most efficient way possible and achieving the different growth metrics established to ensure that the company generates more revenue year after year. Most importantly, you need to understand that a company’s C suite works by the will and pleasure of the board of directors. This is a key point to understand, and you’ll see why in a moment.

Related: The basics of raising capital for a startup

Board of Directors

The next level of the hierarchy is the board of directors. His job is to oversee the management suite, implement macro policy, government documents and tempo. Most importantly, their job is to protect the interests of shareholders by ensuring two things:

One, that the C-suite is operating efficiently and leading the company in the direction that, in the opinion of the board, will lead to the best possible opportunity to increase growth, revenue and profit margins year after year.

And two, that there are adequate railings that govern the way the C-suite operates and provide sufficient risk mitigators against “irregularities” and / or irrational strategies that, in the board’s view, would erode shareholder value. . More importantly, the board generally has the ability to take swift action against a C-suite executive if it considers that such action would be in the best interests of the company and, by extension, the shareholders. .

A good example of this was quite publicly shown on WeWork when the now former CEO, Adam Neumann, was fired from the same company he founded by the company’s board of directors, because (in short) they heard that his actions no longer served. the best interest of the company and, by extension, of the shareholders.

Shareholders

Let’s take a closer look. Shareholders (also known as shareholders) are the owners of a business. They buy shares in the company and each share they buy represents a percentage of the company’s ownership. How big or small this percentage of ownership depends on how many shares the company issues and how many of those shares are bought by one person or another company (both considered investors). Let’s look at two very simple examples of this:

Company A has issued 100 shares. An investor decides he wants to buy 10 shares of Company A. This investor now owns 10% of Company A.

Company B has issued 1,000 shares. An investor decides he wants to buy 10 shares of Company B. This investor now owns 1% of Company B.

Keep in mind that these are, again, very simple examples, and things can be a little more complex than that when looking at a company’s capital structure. However, the purpose of these examples is to illustrate the point that shareholders are co-owners of the company.

Related: Should you introduce your startup to early stage investors?

The importance of seeking synergistic capital

With the above points in mind, let’s examine why the search for synergistic capital as a start-up company is crucial. As stated in the previous discussion, it seems that everyone is working towards the same goal: to make more money for the company and, in turn, to make more money for the company’s shareholders. In the ideal situation, everyone is completely aligned in this effort. However, things are seldom ideal in the real world, especially for start-ups. While the end goal may be the same (make more money), there may be differences of opinion between senior executives and the board of directors on how best to achieve the end goal. This divergence is where problems can begin and where failure can occur for start-ups and / or their founders.

The problem is how most start-ups raise capital. In general, because of the very nature of being an emerging company and all the obstacles associated with it, founders trying to raise capital for their business (especially in the early rounds) are so desperate for capital that they are willing to do it. take it from anyone who is willing to give it away.

The challenge with this approach is that often your first-time investors (especially those with experience in early-stage investing) will likely need to be given a seat on the board as a condition of giving you capital. The justification from an investor’s point of view is that they want to be able to oversee the company — and, by extension — the use of the capital they give it, to make sure that the capital is used properly and efficiently.

When a founder understands this fact, what seems like such a small thing (giving a seat to the board) is no longer so. Remember that the job of the board is to protect the interests of shareholders and to do what they believe will drive shareholder value faster. His belief in how this can be done may not align with the vision of a founder for the company.

Now, many founders who read this article will say, “Well, I own most of my company’s stock, so that’s not a problem for me.” This may be true TODAY, but as you raise more and more capital, you need to give away more and more business ownership (known as dilution), so in short, the more you raise, the less you own. Without proper planning, it’s easy to find yourself, as a founder, in the minority ownership position of the same company you started.

Combine that with a board of directors that doesn’t quite fit your way of running the business, and you could easily find yourself on the outside looking inward (i.e. fired). Even if you are the chairman of the board, it doesn’t matter, you can still be overtaken by the rest of your board.

Curious fact: Did you know that according to Roberts’ Rules of Order (the gold standard on how to conduct board meetings), the chairman of the board cannot even vote unless it is for break the tie?

That is why the search for synergistic capital is so important for early-stage founders. You want to make sure that the people who are investing in you and your business are fully aligned with you and your vision. You want those who believe in you to help you add value to your business through experience, relationships, and investing time in your development as a founder and CEO (and in your own business development). In my opinion, anything less than this is a recipe for a possible disaster (remember that 94% of venture capital-backed companies eventually fail).

The best opportunity for a founder and his company to succeed is to be strategic and intentional in all aspects of their business endeavors, and this is especially important in terms of raising capital. Founders need to remember that venture capital doesn’t work without companies to invest in, so it’s important to remember this point and raise capital as a founder, not as poor!

Related: Raising capital (smart) and why it’s not just about money



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