Sep 8 2021
Entrepreneurs trying to raise funds for their new ventures face a maze of options, with most taking the common route of capitalization rounds. There is clearly a lot of risk money be high – and most tech entrepreneurs gladly take it in exchange for equity. It works for some, but too often founders find themselves diluting their equity to sunk parts rather than considering other financing options that allow them to keep their business – options like debt capital.
Even if you are growing quickly, not all founders want to evaluate their business. In this case, you can offer investors “convertible debt”.
Despite the waves of venture capital in 2020 creating a seemingly endless equity ecosystem, it’s important for entrepreneurs and founders to understand that there is no one-size-fits-all model for raising capital. Debt capital, which refers to the capital raised by taking out a loan, is an alternative path that entrepreneurs should consider.
Understanding the true cost of venture capital debt and when it makes more sense than the traditional path of equity capital depends on an understanding of what you and your business hope to achieve.
Understand your goals
We mainly see two types of startups today: those that want to try something new and those that focus on speed, cost reduction, or simplicity. Facebook, Twitter and Instagram are good examples of the first type: social media did not exist before the Internet. Budget airlines, cell phones (not smartphones) and integrated circuits are good examples of the “faster, cheaper, easier” variety, as they have simply replaced familiar incumbents.
Many entrepreneurs are eager to be the next “try something new” achievement, and I applaud them for feeling that way. Carving out your own market is a fast track to entrepreneurial stardom if you are successful. But unless your main goal is to be famous, it’s often impractical and distracting.
People tend to think that creating categories is less risky than disrupting it in place. However, as long as you really are faster, cheaper, and simpler, patience and strategy can get you where you want to be.
Just as there are different approaches to the market, there are a number of fundraising strategies that best suit your goals. Reaching for investments from leading venture capitalists has its advantages and is a good option if you are a young startup who is carving out a market and needs validation and experience. These companies bring trusted advisors who are focused on growth and who have the resources and experience to navigate the murky waters of category creation.