While returns come from a small number of breakout companies, a VC firm's long-term reputation and deal flow are determined by its relationship with all founders. How a firm supports founders through failure influences whether they'll back them again or if those founders will recommend the firm to others.

In a distressed situation, don't wait for a notice of default. Seize control of the narrative by approaching the lender first with a comprehensive analysis and turnaround plan. This positions you as the solution to a market problem, rather than the cause of the asset's failure.

The frequency of aggressive Liability Management Exercises (LMEs) is declining. Sponsors and lenders recognize they operate in a small world and must return to the same markets for future financing. Damaging relationships is no longer tenable, leading to more rational, pro-rata solutions instead of punitive, non-consensual deals.

Despite weak documentation, private credit deals proceed because lenders underwrite the sponsor relationship, not the legal text. For a top-tier sponsor in a preferred industry, lenders will forgo strong covenants and rely on their ongoing relationship as the primary form of protection.

When considering debt, the most critical due diligence is not on deal terms but on the lender's character. Investigate how they have treated portfolio companies during challenging times. Partnering with a lender who will "blow you up" at the first sign of trouble is a catastrophic risk.

Getting burned once in a partnership can make you risk-averse, closing you off from essential collaborations needed for growth. The key is to attribute the failure to the other party's character and continue to seek out reputable partners, rather than letting fear dictate your strategy.

In the cutthroat world of distressed debt, having a reputation as a frequent and fair "repeat player" is a key asset. Other creditors are more likely to collaborate and less likely to act opportunistically if they know they will encounter your firm again, leading to better resolutions.

In a relationship-driven business, veteran firms like Brown Brothers Harriman consider the borrower's character the most crucial of the "five C's of credit." This subjective measure is deemed more important than collateral or capital, especially during market volatility.

A rising tide lifts all boats. The true test of a founder partnership emerges during downturns. Diligence should focus on teasing out traits like adaptability, humility, and accountability, which predict how a founder will react when plans inevitably go awry.