Over the last decade I’ve spent much of my time managing funds (plus one investment holding company) investing in young companies (a.k.a. startups, a.k.a. SMEs). This includes not only equity investments, and revenue-based investments, but also traditional loans.
Most of the borrowers understand what a loan is, and how loans work. For those that understand the follow the expectations, debt is a virtuous cycle. The company grows. The lenders get repaid. Everyone is happy, and the result is often more loans for larger amounts, bigger companies, more profits, etc.
At the same time, debt can be a vicious cycle. When the borrower treats debt like equity or like a grant, falls behind on payments, and especially when they stop sending updates to their lenders, quite often this entrepreneurs end up needing more capital and don’t understand why it isn’t forthcoming.
The answer is simple. You ignored the obligation you signed up for. You treated your investor like a bottomless ATM, and your actions lost their trust. No trust, no more money for you.
Ultimately underlying all investments is trust.
Your actions decide whether you are trustworthy or not, whether your company is worthy of another investment or not, whether debt is a virtuous or vicious cycle.
