Is debt or equity financing better for your Startup Business?
That’s a pretty big question, and an issue we consult with Founders on regularly.
In the beginning – as a new startup business – the question usually answers itself. You are limited to the resources and credit you have in your personal control as a founder. That’s it.
Now perhaps you’re a member of the lucky sperm club and you have access to family resources. Good for you. But most people don’t and that’s who were talking to here when it comes to making the debt/equity decision.
Also: most of you will never have an investor offer you cash for equity in your company. Usually because planning, executing, and succeeding in an investor capital campaign takes a lot of time, effort, and focus. And you need to be able to execute on your idea, not just brainstorm it – in order to attract capital.
In the beginning, it’s all on you. And also: you don’t get repaid for it. Not now, at least. There are a lot of really dump people that call themselves entrepreneurs and will actually say to an investor that they believe their time is worth $XXX per hour and that they’ve invested XXX+ hours of time and they are somehow “owed”. Investors will laugh in your face and walk away if you do something this stupid.
Why? Because you need to have some skin in the game. You need some sweat equity. You need to show you are all-in. Because you and your idea are just not that special.
So when given the opportunity to accept outside capital, what’s better – Equity Financing or Debt Financing? As usual, it depends.
How fast are you growing? What’s your valuation? How much of your company are you selling? Will you need to raise more money later? If so: how much? And what’s a likely valuation at that point? What is the equity you are giving away now worth? What will it be worth in the future? What kind of ROI are you offering to your investors? Could you do debt financing instead – are investors even interested?
If you are an established, successful entrepreneur with an operating, revenue-generating business: you may be a candidate for debt financing. Debt, generally, is bad. In the world of personal finance. But in business: it’s how the Big Boys do it.
But if you’re a rookie, it’s more like this:
We’ve worked with numerous startup founders who (all) think they have a “unicorn” and are about to be a zillionaire in 18 months like Instagram, but that usually doesn’t happen. But under this belief: nobody wants to give away equity that will be going up in value so much, so if you have the cash flow to justify it (like the big boys): debt is the way to go.
At the end of the day: do you need funding? Not if you’ve got a good business. But if you want to scale: maybe.
The best thing to do is to work hard on executing, making sales, generating revenue, and honing your operations and brand. Because once you’v built your business to a certain level…then…and only then, will what you are doing become attractive to investors.
Until then: do it yourself. All of it.
Happy Startup Finance Friday!