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As an early-stage investor, we are often approached by young companies who inform us they are “raising capital.” We know they are referring to money; however, for early-stage companies (pre-seed and seed) the most important capital they should be raising is not financial capital. Yes, sooner or later money is needed to fuel business growth, but in our opinion, founders should have strategies to raise the following three other types of capital before they start raising financial capital.
Human Capital: Raising human capital means securing someone’s time, experience, and network in exchange for equity. After financial capital, this is perhaps the most straightforward type of capital. In water/wastewater, for example, there are dozens, if not hundreds, of retired or semi-retired executives who have spent their careers building-up and expanding business, and picking up a network of industry friends along the way. More likely than not, they would jump at the opportunity to ‘mentor’ early-stage founders in exchange for equity.
Intellectual Capital: Raising intellectual capital means securing someone else’s technology, brand assets, or business model innovation in exchange for equity. This type of capital is perhaps the most abstract because it requires a unique insight into how a certain ‘puzzle piece’ fits with other puzzle pieces to realize a greater potential. Acquiring a trademark from a third party or a unique distribution channel are two types of moves one could make in this space.
Social Capital: Raising social capital means securing the endorsement from some type of influencer in exchange for equity. This is the hardest to raise because by definition influencers’ most valuable asset is their reputation. If the young company’s promise is never realized, the influencer’s name may become tarnished. However, if an early-stage CEO can ‘raise’ this type of social capital, the company’s chances of making it improve significantly thanks to a high-profile imprimatur.
All an early-stage founder has to work with is their vision, passion, and equity. If the vision and passion are solid, then the founder should be ‘trading’ equity with third parties who can bring in either human, intellectual, or social capital. Unfortunately, many early-stage executives don’t think of this, and they remain steadfast in their efforts to raise financial capital, which ironically is the easiest type of capital to raise if you have already secured the other three.
It's understandably hard for founders to 'give up' equity because the idea/company is their baby, and if the chemistry with raised non-financial capital is not a fit, there could be adverse effects on business prospects, including the ability to raise financial capital. Vetting non-financial capital is a skill in and of itself.
Next time someone mentions the world ‘capital’ (in the context of early-stage investing) you may think to ask them: “Exactly what kind of capital are you raising?” With this article's viewpoint on types of capital, one will be able to better recognize mature founders who understand the different types of capital, and therefore warrant an investment.
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