The Financing Mistakes First-Time Founders Make | Ed Lafferty, Saturn Partners

What we talked about.

In this episode of the Sunny Ray Show, host Sunny Ray talks with Ed Lafferty of Saturn Partners about the financing mistakes first-time founders make and the questions worth asking before raising capital. Ed describes moving from private equity into early stage venture, where gaps in the team, such as a missing CFO, must be found and filled quickly. He credits mentors Richard Lubin and his partner Jeff for teaching him to know the numbers, the business, and the team. Ed shares what he learned from portfolio companies including Constant Contact and Express Natural Gas, and explains why transparency in board meetings builds trust. He discusses Saturn's current medical focus, including a Series C term sheet for Third Pole Therapeutics. On financing, he warns against taking too much money early at a small valuation and giving up control too fast, urges founders to ask whether venture capital is truly needed, and recommends interviewing a VC like a prospective employee. He closes with a rule: money is only one commodity, so be cautious about where it comes from.

Venture capital is the most expensive money you will ever raise, so ask whether you need it and interview the VC first.

The questions, and the answers.

What financing mistake looks harmless at signing but becomes painful a year later?

The biggest one is taking too much money up front at a small valuation. Giving up control too fast is another. Control is something you hardly ever get back once you lose it in the early rounds. Board seats are very valuable, so make sure the people you seat are additive and willing to work with you.

When a founder says they need to raise, what do you ask to find out whether funding is the right next step?

I ask whether they really need venture capital, because it is probably the most expensive money you will ever raise. There is an allure to it, but other options are much less dilutive and less expensive. If those are available, take them. VCs can bring distribution and help, but make sure they are right for you.

What question should founders ask a VC before taking their money?

Every firm says it brings more than money, so find out what they actually bring. First look in the mirror and decide what you need, whether a CFO, distribution, or product help. Then interview the VC like a new employee, and weigh what you give up, whether cash or ownership, to get it.

If a founder has two offers, more money at a lower valuation or less money with more control, how do you weigh it?

I would lean toward control, but I would want to talk about the partner coming in. Why do they want more control, and what else do they bring? There is a trade off in giving up control, so dig in and understand it. Founders should also talk to other entrepreneurs who have worked with that firm.

What does a founder do in a board meeting that makes you trust them more?

They are honest and tell the truth. They share not just what they are trying to do or what their dreams are, but also where they screwed up and what they will do to fix it. That transparency is super important. I like a founder who gives me the real deal.

What surprised you most moving from private equity to early stage venture?

Private equity is a lot of financial engineering on companies that are already accomplished. Early stage is not a fully baked cake. There are gaps in the team, probably no CFO. As an early investor you have to find those gaps early and help founders fill them, because time is of the essence.

How do the best founders tell their story to investors?

Nobody wants to just hear what your product does. They want to know how the product came to you, whether it was an illness in the family or something simpler. I like founders who open with what got them to the place where they became that founder. People invest in people.

If you could give every founder one rule about money, what would it be?

Money is a valuable commodity, but it is not the only one you need. It is gas in the tank. There are lots of places to get it, so be careful who you get it from and how, because there is a cost and a control factor. Exhaust all options.