The Perils of ‘Wrong Money’: Eric Partaker on Investor Pitfalls

In a recent LinkedIn post, Eric Partaker delves into the critical distinction between beneficial and detrimental investment, asserting that accepting capital from the wrong investors can be far more damaging than securing no funding at all. Partaker, a prominent figure in business growth and leadership, highlights that many founders only realize this harsh reality too late.

Understanding the Nuances of Investor Types

Partaker breaks down various investor categories, emphasizing that each brings a unique set of expectations and potential consequences. He begins by examining angel investors, noting their dual capacity to either significantly propel a startup forward or stifle its growth.

“ANGELS can save you or suffocate you. The right angel opens every door in their network. The wrong one texts you 47 times a week with ‘ideas.’ They invested $50K but want to run your company.”

As Partaker points out, the key with angels lies in selecting them based on their relevant experience and network access, rather than solely on the amount they are willing to invest. He cautions against angels who, despite a small financial contribution, seek undue control over the company’s operations.

Venture Capital: Rocket Fuel or Explosive Device?

Moving on to venture capital, Partaker uses the powerful metaphor of rocket fuel, suggesting that while it can accelerate growth, it can also lead to catastrophic failure if applied to the wrong business model. He stresses that VCs typically require exponential returns, often pushing companies towards aggressive, cash-burning strategies.

“Pour it on the wrong business and you’ll explode. They need 100x returns. Period. Your profitable, steady growth company? They’ll push you to burn cash until you break.”

Partaker advises that VC funding should only be pursued if the founder is genuinely aiming to build a ‘unicorn’ – a company valued at over $1 billion. Otherwise, he suggests, founders risk becoming mere lottery tickets for the investors.

Private Equity and Strategic Investors: Different Agendas

The analysis extends to private equity (PE) firms, which Partaker characterizes as driven by financial metrics like EBITDA multiples and exit timing, often at the expense of the founder’s original vision. He warns that PE firms may burden the company with debt, cut essential projects, and prioritize a quick resale.

Strategic investors, while often perceived as long-term partners, also come with their own set of complexities. Partaker highlights that their ‘long game’ might not align with the founder’s objectives. A large corporation might invest with the intention of acquiring the product, restricting the startup’s market access, or vetoing future strategic decisions that conflict with their own corporate strategy.

The Compounding Effect of Poor Financial Decisions

The core message of Partaker’s post revolves around the idea that the negative consequences of taking on the wrong investment compound over time, often proving more detrimental than having no external funding at all. He illustrates this with stark examples:

• The founder who bootstrapped longer still retains ownership.
• The founder who accepted predatory venture terms becomes an employee with diminished equity.
• The founder who sold to PE too early watches their creation dismantled by new management.
• The founder who took strategic funding from a competitor finds themselves in ‘golden handcuffs’.

Partaker concludes by emphasizing the critical importance of due diligence in selecting investors. “Good investors multiply your momentum. Bad ones create friction you’ll fight forever,” he states. He urges founders to thoroughly understand the implications of different investment types before signing any agreements, as their future company and personal stake depend heavily on these choices.