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

Debt Capital

This is part 8 and the final of a series discussing how to think about your startup at different stages of growth. Parts 1 – 7 in this series cover some of the crucial elements of creating a successful SaaS startup and strategies to consider during the early stages of growth. If you haven’t read through the previous articles in this series yet, it’s worth going back and catching up with how to start a company (what to do first), followed by how to know when it’s time to hire your first employee (and who to hire), strategies for raising capital to build a startup team, how to raise a seed round (and how to find Angel Investors), how to pitch to investors and raise angel money, how to raise a Series A round from Venture Capital investors, and finally, how startup valuation works (and how a company valuation affects financing). This article covers alternatives to Venture Capital: debt capital vs. private equity.

“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.

When speed of startup financing matters in order to capitalize on growth opportunities, Lighter Capital is in the business of providing non-dilutive debt capital to 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, the lender will provide you with fast funding that will grow as your company grows (and 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.

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

Important Questions to Ask When Funding Your Startup

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

Funding your startup infographicRevenue-based financing is a good source of debt capital for startups that have strong growth potential and are generating monthly recurring revenue; or, for startup CEOs and founders who want to retain ownership of their business – running it themselves for the long-term.

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?

7 Tips for Venture-Backed Startups

OK, let’s change the scenario a bit. Let’s assume you decided to go the Venture Capital route, and you successfully raised something north of $1 million in capital.

Wow, congratulations! Savor the moment.

Diving into the details of running a venture-backed startup are beyond the scope of this series of articles, so I will leave you with some simple tips and advice. Each of these tips could easily be a full article, or in some cases maybe a book, I will leave it to you to do the further research or find the professional help to move you forward.

  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 my series of articles on 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. Being the CEO is a lonely job. An outside CEO 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!


Seeking Debt Capital for Your Startup?

Looking for Funding?Exploring funding options for your tech startup? Ever heard of revenue-based financing? In short, a company pays a percentage of future revenue to an investor in exchange for debt capital up-front. With Lighter Capital, entrepreneurs can receive from $50,000 up to $3 million in capital to help you get your startup to the next level, without giving up equity or control of your company.

The loan payments are tied to monthly revenue, going up for strong-revenue months and down for low-revenue months. Visit here to see how it works, and if you like what you see, apply for funding today to connect with our investment team!