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

Updated: 1 day ago

You've built a company and have shipped a product or service. You also have revenue. At this point you might be looking for funding to grow and evaluating your options.

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.

Debt Capital

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 growth capital, you are indeed in rarefied air and your needs and issues moving forward are probably beyond the scope of this article.

For the rest of you, we'll answer the two questions most founders ask next:

  • Are there alternatives to venture capital?

  • Should I fund my startup with debt capital?”

Where do startups get funding?

Where Do Startups Get Funding?

A great number of startups rely on bootstrapping or funding from friends and family to get their ideas up and running pre-revenue. As the business grows, additional methods of startup financing become available.

Seed funding from angel investors can provide early sums of funding along with operating expertise and consulting at this point.

It’s the next stage of a startup’s growth trajectory – launch and initial traction – that is the most thrilling and also the most challenging. It’s also at this stage of growth where venture capital becomes a viable funding option. 

A 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. Of course, you have to be willing to exchange equity ownership in your business and give up a considerable amount of control. And in reality, only a tiny fraction of startups — about 5 in 10,000 — successfully raise VC money. Many more spend months and months trying!

Fortunately, there are venture capital alternatives.

Alternatives to Venture Capital

Alternatives to venture capital funding for tech startups

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 contract is written. Proceed with caution.

Should you consider other debt capital?

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

When speed of startup financing matters in order to capitalize on growth opportunities, Lighter Capital is in the business of providing non-dilutive funding to tech startups – based on your recurring monthly revenue stream.

Typically, a startup is required to average about $15K in monthly recurring revenue with gross margins of at least 50%, and if you qualify, we will provide you with fast funding that will grow as your company grows (and we can provide multiple follow-on rounds of funding as needed).

The added upside is that Lighter Capital’s revenue-based financing model doesn’t require that you give up any ownership in your startup, a personal guarantee, or that you give up a board seat.

Contact Lighter Capital, if non-dilutive debt capital seems like a viable strategy for you and your business.

7 Questions to Ask When Finding Funding for Your Startup

For some additional guidance, check out our infographic below, which covers the seven most important questions to ask when funding your startup:

Funding your startup infographic

As a startup grows and becomes more established, the traditional forms of financing — bank financing, growth equity, and eventually an IPO — become more attainable. What’s important is to make sure you are aware of all the funding options and figure out what is the best fit for you based on the stage of your business’s life.

You Just Raised Your Series A Funding Round. Now What?

OK, let’s change the scenario a bit. Let’s assume you decided to go the venture capital route, and you successfully raised a $1 million equity round.

Wow, congratulations! Savor the moment.

Diving into the details of running a venture-backed startup are beyond the scope of this article, so I will leave you with 7 simple tips. Each of these could easily be its own article, or in some cases maybe a book. I will leave it to you to do further research.

7 Tips for Venture-Backed Startups

7 Tips for new venture-backed startups

  1. Watch your spending carefully. Money is life in the startup world, there is nothing worse than running out.

  2. Manage your investors. Communicate with them, make sure their expectations are reasonable.

  3. Build a leadership team and lead them. See our articles on startup leadership or start here.

  4. Watch your equity. Your investors can help you put together a chart of what positions should get how much stock.

  5. Make your numbers. Don’t set your investors’ expectations high thinking that’s what they want to hear. They want you to do what you say you are going to do. Under-commit and over-deliver.

  6. Don’t ignore the importance of the board meeting. Put together a solid board package and listen to your investors carefully. Their concerns and issues will surface in this meeting. Pay attention.

  7. Seek expert help. Leading a startup is a lonely job. An outside consultant can provide a great sounding board for you without repercussions and can provide advice based on years of experience in running startups. Choose one carefully.

Good luck!

Lighter Capital's Guide to Debt Financing for Tech Startups
Learn How to Choose the Right Type of Financing for Sustainable Growth

Debt financing can be a quick and easy solution to funding your SaaS startup’s runway to grow. Not all debt is created equal, though, particularly when you’re trying to scale a new tech business.

Our easy-to-use guide will help you successfully navigate a broad field of debt financing instruments, so you can worry less about cash flows and stay focused on hitting your next milestone.


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