Raising capital: Are you ECE or RDAVE?

All entrepreneurs are not the same. I have found that although there are common traits among them, entrepreneurs have two basic types when it comes to raising capital.

Interestingly, these two types are polar opposites. I call one the Risk and Debt Averse Entrepreneur (RDAVE) and the other the Equity Conservationist Entrepreneur (ECE). Discovering which type you are will help you more successfully raise the capital you need to make your entrepreneurial dreams come true.

The RDAVE does not wish to take on debt, pay interest or be stuck paying back a loan if the business venture fails. He tends to be worried about the debt service payments the company will have to make in order to pay back the investor. The RDAVE may seem to be less committed, but in reality he is simply more conservative and has a low tolerance for debt.

The ECE loves the leverage of debt. After all, he knows he is going to be successful and is convinced that the equity in his company is going to be worth a boatload of money downstream. There's no way he is going to sell equity in his company for cheap early in the entrepreneurial process.

You could position these two types of entrepreneurs at either end of a capital-raising continuum. A specific entrepreneur may be anywhere along the continuum, and may even change from one deal to the next.

The startling difference between these two general types has important implications for the fund-raising process of entrepreneurship. An ECE will regret selling his equity early for cheap. He needs to bootstrap the company until it is strong enough to demand a premium for the equity it sells. The RDAVE, however, is only too willing to sell equity. He realizes he needs the capital and wants the investor to share in the risk of the venture, and he is not afraid to give up ownership to have at least a piece of a venture that creates wealth.

There is nothing wrong with being anywhere along the continuum. The real sin is not knowing yourself BEFORE you attempt to meet with investors and take money in the form or debt and/or equity.

Some might try to tell you that unless you are willing to risk it all and take on debt instead of selling equity, that you are not committed to your venture. Then again, another camp will tell you that it's personally stupid to take on debt and guarantee payments. There is no right answer. The answer has to fit the entrepreneur.