Later-stage Funding Using a Mix of Debt and Equity
09/01/2020 — by Rae Steinbach
The process of securing funding for your startup doesn’t end when you get your first investment. Although this is an important step, you also need to consider how you will secure funding in the later stages of your business’ growth and development. Initial investors provide funding because they believe your idea has the potential to be a major success. Once you’ve developed and released your product, investors will monitor customer reactions to determine if additional investments are justified. This is considered later-stage investing.
There are numerous ways you can provide your startup with this type of funding. Using both debt and equity are two options. This article will discuss both, helping you better understand what steps you must take in the future to ensure your growing business continues to thrive.
Later-stage Funding Using Equity
If you’ve reached a point where you believe it’s time to pursue later-stage funding, you likely already have some degree of experience securing funding via equity. This involves presenting your idea to VCs. You needed to convince them to supply you with capital. In exchange, you provide them with equity in your company. They are willing to provide the initial funding because they believe the investment will pay off in the future.
The process of securing later-stage funding using equity is essentially similar. Now that you have released your product, you need to once again demonstrate its potential.
This isn’t necessarily as simple as you may assume. Even a product that customers embrace may not result in a profitable company right away. Perhaps you haven’t decided how you plan on monetising it yet. If this is the case, you need to coordinate with your co-founders to develop a monetisation plan you can present to investors.
Later-stage Funding Using Debt
Securing later stage funding via debt financing is not as well-understood as equity. However, it can be a very useful method. This is particularly true if your company is generating revenue, but doesn’t have sufficient cash to sustain its growth. Yes, you could rely solely on traditional funding methods, but further investments will likely result in substantial dilution of stock.
That’s not as significant of an issue when you leverage debt financing. Because debt financing is typically less expensive than other methods, stock dilution will be less as well. Additionally, equity involves a permanent commitment to share company revenue with investors. This can strain your business’ finances for years. On the other hand, debt financing doesn’t last forever. You merely secure a term loan from investors in exchange (usually) for warrants for company stock. By putting up assets as collateral, you minimise the risk for investors.
Both of these options are worth considering as you plan how you will go about securing later-stage funding. Again, even if your startup is still in the early stages of growth, planning for the future is crucial to your success.
This article does not constitute legal advice.
The opinions expressed in the column above represent the author’s own.