The Rise and Fall of the Financial Investor
Barbarians at the Gate tells the story of the sale of RJR Nabisco for $25B in 1988, then the largest leveraged buyout in history.
It’s an old book, but it captures the essence of the early approach taken by private equity firms:
- Find underpriced, underlevered businesses
- Acquire them with meaningful debt
- Slash overhead, sell off divisions, consolidate smaller players, and optimize for an exit
This playbook (although effective historically) is missing the levers most entrepreneurs would use to grow their business.
Overgeneralizing to make a point:
- Financial Investors create value by deploying capital in such a way that generates a profit (most simply, buying low and selling high)
- Entrepreneurs create value by building teams, creating and delivering products or services, and forging relationships with customers
We believe the financial investor playbook has built a cohort of elite sprinters who are skilled at transacting, structuring, and squeezing out quick wins. They excel at the 100-meter dash of deal execution but struggle to run the marathon of building a lasting company. Their “value add” is in allocating capital, aggregating a platform, and directing their CEOs.
As one CEO friend half-jokingly puts it, “Investors are like seagulls: they randomly fly in for board meetings, crap on you, and fly out. They are obsessed with single short-term metrics, like quarterly EBITDA margins, at the expense of making long-term investments in the team, product, or technology that are critical for sustainable growth.”
In the past decade, the investor playbook has become particularly focused on the aggregation of smaller and smaller businesses. In this scrappy segment of the market, investors’ disconnect becomes painfully obvious when market conditions shift and the business models break down, leaving operators to weather the storms with advisors who haven’t felt the rain before themselves.
But a shift is starting to occur. We’ve seen more and more people arguing that the era of financially engineering investor returns is over (here, here, and here).
And fortunately, thanks to market pressure, a new way is emerging.
The Dawn of the Entrepreneurial Investor
We define the Entrepreneurial Investor as:
An investor whose past experience is grounded in starting, running, and/or growing one or more businesses personally.
An Entrepreneurial Investor doesn’t see the business through a spreadsheet; they see it through the scars of their own experience.
They know that running a business is often an exercise in controlled chaos. New issues arise daily. For them, that is part of what makes being an operator so intellectually stimulating and incredibly demanding.
Growing a Business is a Knife Fight, Not an Excel Exercise
Entrepreneurial Investors know that business growth isn’t a straight line. A business’s people, products, and systems can typically support growth up to a certain size, at which point the organization “hits the ceiling” (to use an EOS term).
When this occurs, the most valuable conversations for CEOs are often tactical:
- How can we reverse the decline in leads from our Google Business Profile listings, which just tanked?
- How have you dealt with having a high-performing employee who was toxic to your culture?
- How do I know if I’m prioritizing correctly when my to-do list is a mile long, I’m working crazy hours, and it feels like we’re just treading water?
I (Riley) have seen this first-hand at Burgerville, a Portland-based quick service restaurant, where I serve as a board observer for Concentric Equity Partners. Several board members have deep experience in the food and beverage industry and choose to lean in as if the business is their own.
Joth Ricci, the board chair, who has been CEO of Dutch Bros, Stumptown, and Jones Soda, has methodically coached the team in its current growth phase. He constantly pulls on his experience from scaling Dutch Bros to know what is noise and what is music. Like all businesses, the 60+ year-old, family-owned burger chain has plenty of things to improve, and Joth’s operating experience helps the whole team know how to prioritize and act amidst the chaos.
Operators need this support when the ice shifts or they get punched in the mouth. Someone with a large balance sheet, although helpful at times, may not be the answer. People who have felt the intensity of operations and can provide guidance rooted in the learnings from decades of personal experience are invaluable in those moments.
Investors Impact Culture, Which Eats Strategy for Breakfast
Entrepreneurial Investors know that small and medium businesses typically don’t have textbook competitive advantages like economies of scale (like Walmart) or network effects (like Facebook) to fall back on. But what they do have is a deep knowledge of their team and the ability to build a strong, distinctive culture where (nearly) everyone truly cares about each other and their customer.
The problem for financial investors is that culture isn’t a cell on a spreadsheet. They don’t have an intuitive appreciation of its importance, and they don’t realize how fragile it can be.
This is a dangerous combination. Because some of the best ways to destroy a culture are to shift:
- From prioritizing long-term organizational strength to short-term profitability
- From building trusting customer and employee relationships to squeezing more margin in the here and now
- From thoughtfully selecting team members to grow the company to buying “growth” through acquisitions, where the disparate parts have dramatically different cultures
Entrepreneurial Investors know the culture and the team are the golden goose.
Financial investors often don’t have an appreciation that “there are no such things as problems, only people problems” seared into their nervous systems in the same way as entrepreneurs, making them more likely to push for courses of action that are detrimental in the long term.
As our friend Trevor Hightower says, “You are the cultural ceiling of the organization. No one goes above you.” Most people nod to this statement, but few are diligent in ensuring they are continually raising the ceiling. Part of this work is about finding inspiration from other leaders or listening to the pain points of your team and customers, but one essential piece is understanding how you are being influenced.
In a sense, your choice of investors is an early indication of what your company will become.
Enjoying the Journey Impacts the Destination
Seasoned entrepreneurs know the “fun” stage is not the exit. As many iconic quotes echo…it’s about the journey, not the destination.
As an entrepreneur, it’s more enjoyable to work with other entrepreneurs than with financial investors. It’s just the truth. There’s camaraderie from that shared experience.
Entrepreneurial Investors remember what it felt like to see an opportunity others missed, to bet everything on their ability to execute, and to discover that their success depended entirely on earning the trust of customers and employees every single day. So, they often help preserve entrepreneurial joy by:
- Trusting operators to operate instead of requiring approval for tactical decisions
- Focusing on outcomes rather than process compliance
- Leading with empathy from having walked in your shoes
When the inevitable adversity hits, the right investor doesn’t just send spreadsheets showing you’re behind forecast. They roll up their sleeves, share what worked (and didn’t work) in similar situations, and help you find a path forward that strengthens rather than compromises what makes your business special.
I (Grant) named our firm Entrepreneurial Capital because we believe capital exists to accelerate entrepreneurial energy. And without that energy, capital cannot accomplish anything meaningful.
We believe this approach helps preserve the joy of entrepreneurship as we journey together.
In Practice: Identifying Entrepreneurial Investors
The good news is that it’s not hard to find out if a potential capital partner is an Entrepreneurial Investor or a Financial Investor.
Good questions to ask include:
Operating Track Record
“Tell us about the business you’ve run that you’re most proud of growing. What were the plateaus, and how did you get through them?”
Watch for: Specific, detailed stories about real operational challenges, not generic platitudes.
Culture Stewardship
“Tell us about the culture of businesses you’ve been involved in. How did you actively invest in it and protect it?”
Watch for: A clear understanding that culture is an asset worth investing in, not just managing around.
And remember: you are who your friends are. For better or worse, you will become more like the people involved in your business, including your investors.
Relationships in Good and Bad Times
“Can you tell me about a deal that did not realize its full potential because of the operator?”
Watch for: How they allocate blame. If the balance is not at least 50/50, with the investor taking responsibility when things go wrong, walk away. Investors influence operators, and as a result, should have a Jocko Willink-esque ownership mentality regardless of the outcome.
We admire every entrepreneur, whether starting, buying, or scaling a business. You are the people who create jobs, improve standards of living, and move this planet forward.
Conclusion
When you choose your capital partner, don’t just look at their check size. Choose the people you’d be proud to share the journey with, because their fingerprints will be on the company you build (and on the life you live!)