Our Venture Capital Obsession

Pascal Finette

A whopping 60% of the Inc. 500 companies were bootstrapped on less than $10,000. No angel money, no seed rounds, no Series A. Bootstrapped to revenue growth which wins them an Inc. 500 award. I find this truly remarkable. Something to chew on, think about and reflect on... We might have an obsession with venture capital which isn't quite healthy anymore.

 



Filed Under:
Collection: Funding
Category: Funding Options & Sources

Financing Options: Working Capital Financing

Fred Wilson

As a company grows, it starts to consume a lot of cash in the day to day operations of the business that has nothing to do with its profits or losses. This type of cash consumption is called working capital. In accounting terms, working capital is equal to current assets minus current liabilities. In layman's terms, working capital is what your customers owe you plus any inventory you have built up minus what you owe your suppliers and employees. Working capital also includes any cash you have in the bank.

 



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Collection: Funding
Category: Funding Options & Sources

Financing Options: Bridge Loans

Fred Wilson

Bridge loans are so called because they are a "bridge" to something else. They are short term loans intended to fund a company to an anticipated event in the future. In the startup world, bridge loans are a particularly interesting case to study. I've been in and around startups for 25 years now and I have rarely seen a bridge loan made by anyone other than an existing investor or investor group. Most bridge loans in the startup world are made to money losing companies that are going to run out of funds before they can close a financing or sale transaction. These are very risky loans that will not get paid back unless a transaction happens and often the transactions that are required don't happen.

 



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Collection: Funding
Category: Funding Options & Sources

Financing Options: Capital Equipment Loans and Leases

Fred Wilson

Equity capital is expensive. Every time you do a raise, you dilute. It makes sense to look for places where you can use other less expensive forms of capital to fund growth. As we talked about in the last post in this series, I'm not a fan of debt for an early stage startup because there is no obvious way that the debt is going to get paid back. But capital equipment provides an opportunity for debt financing because you can borrow against the equipment. There are two primary ways to do this, capital equipment loans and leases.

 



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Collection: Funding
Category: Funding Options & Sources

Financings Options: Venture Debt

 Fred Wilson

If there were two words less likely to be found together, it would be venture and debt. Startups are not credit worthy enterprises. They have little to no assets and no cash flow. Equity is the appropriate way to finance startups. However, there is a large, growing, and vibrant market for something called Venture Debt. It is indeed debt, largely provided by a number of banks and finance companies who specialize in this market. The terms are usually three years, interest only, balloon payment, with warrants for the equity kicker. Now that I've just thrown out a bunch of buzzwords, I'll explain each of them.

 



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Collection: Funding
Category: Funding Options & Sources

Financing Options: Convertible Debt

Fred Wilson

Convertible debt is when a company borrows money from an investor or a group of investors and the intention of both the investors and the company is to convert the debt to equity at some later date. Typically the way the debt will be converted into equity is specified at the time the loan is made. Sometimes there is compensation in the form of a discount or a warrant. Other times there is not. Sometimes there is a cap on the valuation at which the debt will convert. Other times there is not.

 



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Collection: Funding
Category: Funding Options & Sources

Financing Options: Preferred Stock

Fred Wilson

Almost all venture capital firms and many angel and seed investors will require the company they are investing in to issue them preferred stock. The vast majority of equity dollars invested in startups are securitized with preferred stock. So if you are an entrepreneur, it makes sense to understand preferred stock and what it means for you and your company.

 



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Collection: Funding
Category: Funding Options & Sources

Financing Options: Vendor Financing

Fred Wilson

 

Two reasonably common examples of vendor financing in the world of tech startups are equipment financing and development for equity. Equipment financing is when a vendor of capital equipment, like servers, agrees to sell you their product and takes a loan or a lease instead of cash. Development for equity is when a third party development firm builds something for you and takes equity in your business (or less commonly, a loan) in return for the development services.

 



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Collection: Funding
Category: Funding Options & Sources

Financing Options: Customers

Fred Wilson

Customers are a great way to finance a business for many reasons. First, customer financing is typically non dilutive. They want something from you other than equity in your business. Customers also help you fit your product to the market. And customers will help debug and improve the quality of the product. An early customer will give you credibility with other customers. And an early customer may spend more with your company down the road.

 



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Collection: Funding
Category: Funding Options & Sources

Financing Options: Government Grants

Fred Wilson

Governments will provide capital for startups and I've seen many entrepreneurs over the years take advantage of this form of financing. The grants are usually "free money" in the sense that they do not need to be paid back and they don't cost any equity. But nothing in life is free. You do pay for this money in ways that may not be in your interest. The application process is usually long, involved, and distracting. And sometimes the grants come with strings attached; you can't move, you have to use it for a specific purpose, you have to hire a certain number of people with it, etc, etc.

 



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Collection: Funding
Category: Funding Options & Sources

Financing Options: Contests/Prizes/Accelerator Programs

Fred Wilson   

You are not likely to fund your business all the way to cash flow breakeven on the money you get from an accelerator program or winning a contest (although I'm sure someone has done it). Funding startups is like climbing the stairs. You have to go up the first stair to get to the second one. These kinds of events/programs can be a great first or second stair for an entrepreneur. It can give you the money (and connections) you need to get going and get somewhere and set yourself up for the next funding source.

 



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Collection: Funding
Category: Funding Options & Sources

Financing Options: Friends and Family

 Fred Wilson  

Many entrepreneurs turn to friends and family for their first funding needs. In fact, it is common for non-tech startups to raise all the capital they need from friends and family. I don't know for sure, but I would suspect that friends and family make up the largest source of funding for entrepreneurs and startups. Friends and family financing is popular because it is easy to get a hearing from the people who know you best and they are positively inclined to say yes. But there are some negatives as well.

 



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Collection: Funding
Category: Funding Options & Sources

Converts Versus Equity Deals

Chris Dixon

I am a proponent of convertibles, but only with a cap (I’ve written about the problems of convertibles without caps before and never invest in them).  I believe that pretty much every other seed investor who advocates converts also assumes they have a cap.  So any discussion of convertibles without caps seems to me a red herring.

 



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Collection: Funding
Category: Funding Options & Sources

Should Your Startup Give Performance-Based Warrants?

Mark Suster

Often the reason that startups offer performance-based warrants (PBW) is because they’re asked to.  You should think of PBW’s in the same way as you think about employee options – they are an incentive for an important partner in your business to help you achieve success over time.

 



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Collection: Funding
Category: Funding Options & Sources

The Most Important Question to Ask Before Taking Seed Money

Chris Dixon

There is a certain well respected venture capital firm (VC) that has a program for fledgling entrepreneurs.   The teams that are selected get a desk, a small stipend, and advice for a few months from experienced VCs.  I could imagine back when I was starting my first company thinking this was a great opportunity – especially the advice part. Here’s the problem.  A few years into the program, approximately 25 teams have gone through it.  The sponsoring VC funded one team and passed on the other 24.  None of those other 24 have gotten financing from anyone else.  Why?  Because once you go through the program and don’t get funded by the sponsoring VC, you are perceived by the rest of the investor community as damaged goods.

 



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Collection: Funding
Category: Funding Options & Sources

Should I Give my Lawyers Equity?

Babak Nivi

When lawyers defer their legal fees, they expect equity for the risk of not getting paid. If their risk is low or they’re not deferring fees, you can say no. In any case, offer them the right to invest $25K-$50K in your financing instead of giving them free equity.

 



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Collection: Funding
Category: Funding Options & Sources

Make Your Debt Attractive to Investors

Babak Nivi

Seed investors often argue that debt doesn’t incent them to (1) help the business and (2) increase the share price of the eventual Series A. Actually, (1) debt does incent investors to help the business and (2) equity may also incent investors to decrease the Series A share price. That said, you can make your debt much more attractive to investors with a few concessions.

 



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Collection: Funding
Category: Funding Options & Sources

What are the Benefits of Debt in a Seed Round?

 Babak Nivi

Convertible debt is often the best choice for a seed round. It is convenient, cheap, and quick. It lets you close the financing quickly and turn your focus back to your customers—that’s good for the company and its investors.

 



Filed Under:
Collection: Funding
Category: Funding Options & Sources