Choosing the Right Investor Capital For Your Business
Advice for Business Founders Series | Article 1
Evan Schnidman, CEO, Outrigger Group
Welcome to Outrigger Group’s “Advice for Business Founders” series, where we provide simple, no-nonsense advice on business operations topics frequently requested by our clients.
In this first installment of our "Advice for Business Founders" series, we’ll break down different types of investor capital and help you determine which is best for your business.
VC Funding: Not Right For All Businesses
Many founders assume venture capital (VC) is the gold standard, but the truth is that VC funding is just one of many options—and often, it isn’t the best choice.
Good VCs measure success based on internal rate of return (IRR), not just the multiple on invested capital (MOIC). That means they prioritize businesses that can scale quickly, delivering high returns within a set timeframe. But not all businesses can—or should—grow that quickly. If your business has a long development cycle or doesn’t have the potential for rapid growth, it may not be a good fit for venture capital—even if it can eventually reach significant scale.
VCs typically look for businesses that will scale proportionately to the stage of their investment:
Early-stage investors need to see the potential for a massive return, but they are comfortable with more uncertainty.
Series A investors require a clear path to a 10x return.
Growth-stage investors are willing to accept lower multiples, but will demand faster returns.
Later-stage investors require a well-defined exit strategy that nearly guarantees returns.
Many businesses are better suited for alternative funding sources such as angel investors, family offices, or debt financing. Each of these options has unique advantages and structures that can better align with your business's goals.
Angel Investors and Family Offices: A Flexible Alternative
Many businesses can benefit from alternative funding sources like angel investors or family offices, which are typically more patient than VCs. In addition, they often have domain expertise and/or relevant connections that can significantly impact your businesses in its early stages. Angels and Family Offices can also be more creative and flexible in terms of the investment vehicle and structure (debt and equity).
This is not to say that angel investors or family offices are a panacea. In fact, it is not fair to characterize angels and family offices as a unified class at all. Each angel investor, and especially each family office, has their own unique interests, incentives and expertise. It is vital then that founders do their diligence on these investors to not only understand their investment structures and terms, but also their specific incentives.
The remainder of this article helps shed light on the varying investment structures that founders need to understand before raising capital.
Investment Structures Explained
Equity financing involves selling ownership stakes in your company in exchange for capital. This is a common approach for startups and growth-stage companies that expect significant future valuation increases.
Pros:
No immediate repayment obligations
Investors share in the company’s success
Can attract investors with valuable expertise and connections
Cons:
Dilutes founder ownership and control
Investors often expect high-growth and eventual liquidity events (e.g., acquisition or IPO)
May lead to misaligned incentives if investors need liquidity before the business is ready
Debt financing may be a great fit for businesses with longer development cycles or those deemed a “safe bet.” Debt financing involves borrowing money that must be repaid over time, usually with interest. This can be a good option for businesses with predictable cash flow or those looking to maintain control.
Pros:
No dilution of ownership
Predictable repayment structure
Allows businesses to retain more control
Cons:
Requires consistent cash flow for repayment
May include personal guarantees or collateral requirements
Can be risky if growth is slower than expected
Convertible debt is a hybrid structure where an investor lends money to a company with the option to convert the debt into equity under certain conditions, often at a future funding round.
Pros:
Delays valuation discussions until a later stage
Provides flexibility for both investors and founders
Can offer downside protection for investors
Cons:
Can create uncertainty around future dilution
Interest accrues, which may become a burden if conversion doesn’t happen quickly
Terms can become complex and investor-friendly if not negotiated carefully
SAFE (Simple Agreement for Future Equity) notes allow investors to provide capital today in exchange for future equity at a later financing event, typically with a discount or valuation cap.
Pros:
Simple structure with fewer legal costs
No immediate dilution or repayment obligations
Founder-friendly compared to traditional convertible debt (Convertible debt is treated like any other debt in a liquidity event, meaning it is typically senior in the stack and must be fully repaid before equity owners are paid. SAFEs avoid this problem, making them more attractive to founders but less attractive to investors)
Cons:
Investors take on more risk without interest accrual
No guarantee of conversion if the company never raises a priced round
Can complicate future funding rounds if many SAFEs are outstanding
Choosing the Right Capital for Your Business
The best investment structure depends on your business model, growth trajectory, and long-term goals. Consider the following:
High-growth startups that can scale quickly may benefit from VC funding or equity financing.
Steady-growth businesses with reliable cash flow may find debt financing a better option.
Companies with uncertain valuation might prefer convertible debt or SAFEs to defer pricing discussions.
Founder-led, long-term businesses may be best served by flexible (and often patient) angel investors or family offices, with an investment structure that reflects the realities of that specific business.
Finding the right investor is about more than just securing funds; it’s about aligning incentives and expectations. As you evaluate funding options, be honest about your company’s potential scale, growth timeline, and what kind of investor relationship you want.
Stay tuned for the next article in our "Advice for Business Founders" series, where we’ll dive deeper into the differences between building services businesses, software businesses and data businesses.
Additional Resources
“A Guide to Seed Financing” - YCombinator
Startup Fundraising: How to Manage Your Investor Pipeline and How to Raise Venture Capital Funding for Your Startup – 7 Tips From a VC - Fidelity Private Shares
At Outrigger Group, we provide fractional executive support to help you achieve your version of success. Whether you're scaling, pivoting, or refining your strategy, our experienced team is here to offer support without slowing you down. Reach out to info@outrigger.group if you want to start a conversation.