This sponsored post is produced by Lighter Capital.
At Lighter Capital, we spend lots of time talking to growing technology companies about what funding options make the most sense for them — Venture Capital? Revenue-based financing? Bank loans?
[aditude-amp id="flyingcarpet" targeting='{"env":"staging","page_type":"article","post_id":1683023,"post_type":"sponsored","post_chan":"sponsored","tags":null,"ai":false,"category":"none","all_categories":"business,dev,entrepreneur,mobile,","session":"B"}']The kind of capital you raise, and when you raise it, will fundamentally impact and shape the future trajectory of your business and it will determine how much value you can expect to extract in the long term. So it’s important to have a thorough understanding of the trade-offs, risks, and pay-offs that come with different funding options.
Our Guide: How to Choose the Best Funding Path for your Startup offers up several important questions you should answer. If you take time to think these through when deciding your funding option, you’ll likely get a lot closer to both the financial and personal outcomes you’re looking for.
1. What funding path best suits your business growth strategy?
In general, there are three main funding paths most companies take based on a particular company’s expected growth trajectory:
- The VC-backed path is for companies targeting large $1billion plus markets, requiring periodic, large infusions of capital and seeking to exit via sale or IPO with at a minimum 10 times return.
- The Non VC-backed path is for companies generating growing, predictable revenues, and strong margins. It’s for those requiring smaller capital amounts periodically to boost growth seeking to retain total control over their business.
- The Blended Path is for those who can get to scale on their own or by using debt in the hopes of boosting growth or market share which in turn may get them a better valuation from an equity investor.
Once you decide which is the funding path that best suits your business growth strategy, our Guide offers up the important questions you should answer when deciding which specific funding option will give you both the financial and personal outcomes you’re looking for. You can get more detail in the guide but here’s a quick overview:
2. How much capital do you need?
Securing as much capital as possible is an understandable impulse and in the guide we give you some general rules for what you can expect to raise from different funding sources. But make sure you know what you are going to do with it. Having too much can cause you to lose focus or be unprepared for the consequences of a sudden growth spurt. A well thought-out business plan which sets out what your growth milestones are in six months, one year and three years will help you figure out the right amount for each stage.
3. How much equity are you willing to give up?
Make sure you understand exactly how much you will be giving away in terms of future value. Taking equity partners on early in the life of your business will require you to give up larger slices of your equity. If you can fund growth via debt using instruments such as revenue-based financing before turning to VC’s you may be able to negotiate a stronger equity outcome for yourself at a higher valuation.
4. What are you willing to risk to fund your business?
Before you raise capital, make sure you know all the risks. There are the financial risks — both personal and business-related when you take on debt funding. Not all debts requires you to put up your personal assets as a guarantee —revenue-based financing for example. While equity comes with little or no financial risk you may well be risking the control you have on how you run and ultimately dispose of your company.
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5. How do you want to repay the money?
Obviously equity means not having to make regular repayments to the capital provider and debt normally requires some kind of regular repayment schedule to be followed. But equity comes at a much heftier price tag in the long run with most VC’s targeting at least a 10 times return on their investment. Debt requires more discipline but will cost you significantly less in the long term.
6. Do you want guidance in growing your business?
One of the advantages of being an entrepreneur is that you make all the decisions that matter. But no one has all the answers. Equity investors, particularly VC’s, provide a large amount of human capital, guidance, and business connections that can help you grow the business. Banks usually don’t get too involved. We tread the middle ground providing guidance and making connections as much or as little as our entrepreneurs require.
7. How long can you spend raising funds?
Obtaining financing can become a full-time job, significantly disrupting your capacity to run your company. Before you seek financing, consider how long it will take to raise funds and how much of a distraction it will be. How much time will you spend courting potential investors? How much time will you spend filling out reams of paperwork for a traditional bank loan? Check out our Guide for the time we estimate it will take you to secure different funding options.
No one can predict exactly how a company will grow and what twists and turns will impact its future trajectory. But what you can do is start with a funding strategy that makes most sense to you based on a thorough understanding of the trade-offs, risks, and pay-offs that come with different funding options.
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Download a copy of our Guide: How to Choose the Best Funding Path for your Startup.
BJ Lackland is CEO of LIghter Capital.
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