Startup Funding: Types and times
There are many types of capital raises for a business (with Venture Capital being the most common). Angel Investors, Crowdfunding, SBA microloans, and non-dilutive funding are some other common forms of startup funding.
But is one type of startup funding better than the rest?
What about small businesses?
Does it matter what series funding you're raising?
Let's take a closer look at debt vs equity, and determine which capital type is best for YOU and your bottom line.
Why are you raising? A basic, but fair question that must be asked. As with everything in life, different situations require different solutions.
Would you take a loan of $2,500 with a 40% interest rate to buy a $5 product?
Of course not!
Would you dilute your equity to add capital to supplement your marketing budget?
Is that the best way forward for a growing company?
Equity financing most certainly has its use cases, and in those cases, debt is not the answer. Really breaking down why you need the capital is a great point to look at the debt vs equity question.
When to raise debt/equity?
Now that you know why you're raising, you can determine the path to take. One thing to remember is that debt requires you to pay the lenders back. This means that debt is not a good option for pre-revenue companies who don't have the means to repay the lender.
As mentioned before, debt is great for marketing, inventory, and other areas that have a direct connection to ROI. For example, a DTC brand that has strong seasonal sales would probably avoid an equity raise to support inventory. There are debt options like inventory financing that can better support them.
Equity raises on the other hand are great if you need massive amounts of cash and don't have a strong revenue flow. An example of this is a hardware company that needs to purchase heavy machinery for production. In this case, equity financing can meet their needs better than debt and that is the path they should choose.
Another important factor to consider when choosing the type of capital to raise is timing. Timing is everything, as most startups are hard-pressed for time. Business owners can do market research to determine how timing affects raises, but here are some questions to ask yourself.
Do you have Angel Investors or Venture Capital groups lined up?
Is this Series A funding? Series B funding?
Having potential investors changes the equation as your time spent fundraising will decrease. Later rounds can also be larger raises that are beyond the capacity of a debt lender, this is why considering your series funding matters. Looking to the future is very important as raising the capital can take more time than you planned.
Raising debt is generally faster as some lenders can approve you in as little as 24 hours. The general rule with debt financing is this: if your data is good, so are you.
Equity financing is a bit different. There are pitches and many potential investors will want to meet many times before investing. Raising equity can take as long as 6 to 9 months ( Forbes).
Other things to consider
After you determine what type of financing you need, there are still things to consider.
Debt is great as you keep full control of your company, but there are things you have to understand. As mentioned before, most non-dilutive funding requires some form of repayment. This might make small businesses wary especially if their revenue isn't predictable.
Equity financing removes the burden of repayment, but the obvious downside is the loss of equity. This has to be strongly considered as you raise multiple rounds and your stake in your company shrinks. At the end of the day, there is no “best type of capital”, it all depends on your circumstances.
There are many factors to consider when choosing the best way forward in a fundraise.
What you want to do and what you should do can be very different scenarios.
Timing is very important and a frantic last minute fundraise won't go as well as it could.
The bottom line is that being prepared well before you need to raise is the best way forward and can significantly reduce the friction in your raise.