Who Do You Want In Your Deal? Do You Want Dead Funding?

Posted by Jeff Carter
on May 4th, 2012

As an investor, I see a lot of companies. I have a basic protocol that I use to judge each and every one of them. That helps me compare and contrast investments, and it also helps me calibrate risk and reward. Of course, each business is different, and each has it’s own special nuance that the entrepreneur thinks will propel it to greatness.

However, let’s think about the other side of the table. Does the entrepreneur want me in their deal? Or are they just looking for a check?

Here is the article that inspired this post. Mark Zuckerberg co-founded Facebook with Eduardo Savarin. Early on, Savarin was pushed out of the deal. Mr. Savarin stands to be worth a couple of billion today after Facebook’s IPO. He moved to Singapore, and doesn’t do a lot of investing. A lot of people there wish that he would, but I pose the question to entrepreneurs, is he the kind of investor you want in your deal?

It’s just as important for the entrepreneur to engage in due diligence on their investors as it is for the investor to investigate all aspects of the entrepreneur.

Raising money is brutal. I feel for anyone that has to do it and I am about to go do it for myself. Seed stage companies can be very fragile things. One item that can plague them is what’s known as dead equity. This is when one founder leaves with equity in the firm and doesn’t help the firm grow after they leave. But another important thing for entrepreneurs to think about is “dead funding.”

A lot of inexperienced early stage investors think that all they do is write a check, maybe serve on the board and analyze financial statements for the company. If that’s their attitude, I don’t care how much money they have. As an entrepreneur, you probably don’t want a lot of passive investment in your deal.

Ideally, investors in your deal will bring something else to the table besides a check. It can come in a variety of ways. For many deals, it’s the access to a valuable network that is more important than anything else. For others, it’s mentoring. Still others, technical expertise. Different deals demand different skills and investors can either provide, or give you a lot of access to those skills.

Don’t accept “dead investment” if you can avoid doing so. Sometimes the money raising process is so tough, you accept any money. But make sure at least some of your investors can help you out.

Of course, the flip side can also be damaging. Too much involvement in the company isn’t a great thing either. As an investor, you aren’t there to take the reigns. You are there to support the company in any way that you can. Too many cooks spoils the broth and investors sometimes feel the entitlement to get into the kitchen when they don’t belong there.

In the cat and mouse game of fundraising, it’s important to know who is writing that check. Today’s salve of dollars might create unspoken problems for you down the road.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.