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Alternatives to Venture Capital: Debt Capital vs. Private Equity [Infographic]

Debt Capital
“I have built my company and have a shipping product or service. I have revenue. Are there alternatives to Venture Capital? Should I fund my startup with debt capital?”

Well first, congratulations for getting to an actual shipping product or service! Having paying customers is huge if you have gotten to this point without having to give much of your company away to investors.

Maybe you got here with just your own money, friends and family money or a seed investment. Having revenue from paying customers is a game changer in the world of startups. While I don’t know the actual ratio of companies started to companies reaching this stage, I do know it is very small.

You now have more funding options open to you, including Venture Capital, private equity and debt capital. If you don’t need more growth capital, you are indeed in rarefied air and your needs and issues moving forward are probably beyond this series of articles.

Funding Your Startup’s Growth

Funding a Startup

A great number of startups rely on bootstrapping or funding from friends and family to get their ideas up and running pre-revenue. As you grow your business, additional methods of startup financing become available. Seed funding from angel investors can provide early sums of funding along with operating expertise and consulting.

However, it’s the next stage of a business’s growth trajectory – launch and initial traction – that is the most thrilling yet also challenging. It’s also at this stage of growth that Venture Capital becomes a funding option. My previous article discussed the issues around raising a Series A round of venture money.

In short, Venture Capital firms usually provide a large capital investment (relative to the size of the company) in exchange for equity. They can also provide access to experienced experts, outside connections, and further guidance to help grow the company — if, of course, you’re willing to exchange equity ownership in your business and give up a considerable amount of control. Fortunately, there are alternatives to Venture Capital funding.

Alternatives to Venture Capital for Funding a Startup

Alternatives to Venture Capital

The first option you should consider is to continue to fund your startup from your monthly revenue. As your revenue increases, you can add people and components in whatever priority order you think is right.

The upside of this strategy is that you are growing your company organically and as long as your business continues to grow all is well. The downside of this strategy is two-fold. The growth of your company can be held back because of missing people or components such as marketing funds, and your ability to survive a business downturn may be dramatically reduced because all of your profits are being put back into the business.

Should You Go Back to Your Seed Investors?

Your next viable option is to go back to the investors you already have, assuming you have any. Since this scenario is based on you having raised no more than seed money, if your growth capital needs are more than they can or will handle, then you may have to pursue another strategy. Angel investors can get uncomfortable writing large checks or investing in later rounds. Friends and family money typically have an even lower ceiling.

If your capital needs are pretty small, this may be an option, but you will likely be giving up more equity every time you go back to the well for money.

Should You Consider a Bank Loan?

How about a source of funds that doesn’t require you give up equity?

A bank will loan you money based on your revenue, however, from my experience bank loans to startups come with a lot of performance requirements and may include some small equity component. A traditional bank loan will require a personal guarantee — your house, car, personal bank account, and even retirement savings. All OK if you continue to grow; not so good if your revenue or company performance falls below the bank requirements.

Yet the reality is a bank loan isn’t intended to fuel your startup’s growth; banks will only lend you as much as you’re currently worth, which makes it extremely difficult to grow with the funds they provide. Furthermore, your loan can get called — the lender can demand repayment at any time — or they can grab a larger stake of equity, depending on how the deal is written. Proceed with caution.

RELATED: Why Do Banks Hate SaaS Companies?

Should You Consider Non-Dilutive Debt Capital?

Should you decide that bank loans aren’t appropriate for your startup’s debt financing needs, other ways to generate non-dilutive debt capital are issuing corporate bonds or notes payable. Both give your startup the opportunity to set its own interest rates, and notes payable can be renegotiated.