October 10, 2023

There are no evil financial tools - only evil financial partners

Happy Tuesday, friends. Today, I wanted to share a lesson I’ve learned over the past few years, and one that continues to come up in conversations lately. In fact, it will be a topic in our next RBFN podcast episode, which will drop next Tuesday (stay tuned!), and it’s something that Mike Luebbers talked about in our podcast episode released last week.

Here it is: There are no evil financial tools. In fact, there’s a place for every financial tool in the arsenal, whether it’s a short-term loan or a unique hybrid of redeemable equity and high-interest debt.

There are bad financial partners, and sometimes they might even be evil. Below I’ll share a very simple test to ensure you never become a bad financial partner (even by accident).

See, there are tons of ways to charge entrepreneurs exorbitant amounts for the capital you provide. You can simply charge a usurious APR (don’t do that, please). You can play a game of hide the ball, and pretend like your “fee” is actually APR, leaving it to the entrepreneur to figure out the difference (this happens all the time). You can ding the entrepreneur with a fee, an interest rate, a warrant, a success fee, and an equity conversion (that would be a lot, granted).

In my view, it all comes down to intent and transparency. It is incumbent upon us as financial partners to be transparent about how we charge for the capital and service we provide, and what the actual cost is.

Of course, you should be compensated for the risk you take as a lender or investor. But it should be appropriate compensation for that level of risk. And that’s the hard part for a lot of funders. They don’t seem to be able to align risk with cost. (And in some cases, they don’t care: they turn their customers/borrowers into cash machines for their businesses without regard for the impact).

So here’s a very simple and fundamental test to make sure you aren’t being evil, even inadvertently. Ask yourself this question: would I take this deal knowing what I know about its structure and cost? If the answer isn’t hell yes, then it’s time to step back and review your structure and cost.

I know that seems like a simplistic test. It might even seem silly. You’d be surprised how many capital entrepreneurs out there haven’t asked themselves that fundamental question, and who therefore either fail to get to market or worse, deploy capital that harms the entrepreneurs they work with. It’s easy to get wrapped up in the details of a cool new funding structure, or a set of growth and deployment goals that steal focus from the most important goal we all have: to help entrepreneurs grow their businesses.

That’s it from the front lines this week, folks. Feel free to drop me a line anytime, and please do subscribe to the newsletter and the podcast!