Whether your startup is just getting off the ground or scaling up quickly, capital is the common denominator to success. These key tips can help as you think about how to raise, manage and maintain capital throughout your business’ life cycle.
Today is an opportune time to seek capital. There are roughly 10 times as many providers lending to high-growth startups than there were 15 years ago, according to Tim Sandel, Managing Director, Middle Market Banking & Specialized Industries at J.P. Morgan. Today’s debt environment has been shaped by four factors:
These factors have led to a venture market with $10 billion to $12 billion in debt available annually, giving startups a greater range of funding options. But this also underscores the need to understand the complex range of debt options available.
The debt options available to your startup largely depend on the where your business is in the growth stage life cycle, Sandel said. As you get started, options are fairly limited—often cash secured and personally guaranteed by you or your cofounders. The available debt structures, however, will increase in tandem with business growth. So if your business doesn’t qualify for certain loan types, it may in the future. Debt structures range from asset-based lines of credit, which have lower interest rates and less flexibility, to bullet loans, which have higher interest rates and more flexibility.
While banks tend to offer more asset-oriented options, hedge funds typically provide enterprise value-oriented debt structures. Business development companies and specialty private funds provide more flexibility across the spectrum.
In addition to the necessary documentation, lenders look at your startup’s revenue model when evaluating applicants, Sandel said. “Is it a subscription, recurring, predictable business? Or is it a product sale, a service business that is not repeatable and requires continual sales and marketing to drive revenue?” Additionally, lenders look at the composition of your customer base and whether it’s highly concentrated, seasonal or consumer focused.
When it comes to equity funding, it’s important to have a strong brand story. “You’re really selling yourself and your story,” said Andrea Hippeau, Principal at Lerer Hippeau Ventures. “The better storyteller you are at the seed stage, the better off you’ll be.”
Instead of relying heavily on advisors during the seed stage—a common mistake among founders—own every aspect of your business. You should understand the numbers behind your startup and speak to them. Investors want to see that you have a well thought out plan on how you’ll go to market.
If you choose the venture capital (VC) route, develop a funding strategy that looks beyond your current round of fund raising. “Once you take a single dollar of VC capital, you’re on the hamster wheel of venture,” Hippeau said. “You’re committed to raising more rounds of capital and having it scale in a certain way.”
Whether you choose debt or equity financing, you want a provider that’s a good fit for your business as it matures. “Choose a provider who is going to be there when things don’t go according to plan—because they’re not going to,” Sandel said.
How do you select the right source? During interviews, keep in mind that you are also evaluating the providers. Ask about their culture, current and previous clients, and how they will work alongside you in the long term.
“You want someone that’s going to stand with you and support you throughout your journey,” Sandel said. “Choose someone that can help you grow.”