The sponsored post is produced by Lighter Capital.
Figuring out funding options when your tech company’s in the early growth stage is a bit like asking what you want to be when you grow up.
You could just blurt out the first childhood fantasy – pro baseball player – or, in this case, a tech biz with an exit of $200 million. But eventually, you leave Little League behind and have to start asking questions about what’s important to you to figure out what your real-life calling is.
So it is with funding – the right kind of funding is going to depend entirely on a few essential questions about what’s important to you as you build your company – and where you want it to end up.
Control and Ownership – what are you willing to give up?
This may be the most pivotal question of all. How you fund growth will determine what kind of control you maintain over the direction of your company. It will also determine how much value you ultimately extract from it.
For some tech companies, securing venture capital represents the brass ring, but it comes with a steep trade-off in equity and control. If you know you’re playing in a space with a breakout product and a model based on a market of $1 billion or more, you might decide that the kind of financial rocket fuel and human capital available from VC companies is a balanced trade-off to diluting your company, and giving up some control over its direction. Angels are good if you’re looking for smaller amounts to get you off the ground, but they still want their slice of your equity.
Funding options that keep control squarely in your own hands include revenue-based financing and traditional bank loans. Revenue-based financing can offer significant funding between $50,000 and $1 million without losing any ownership. It works by providing a loan in exchange for a percentage of ongoing monthly revenue – and you stay in control of your company.
Traditional bank loans also mean no loss of ownership or control, but the tech-friendly banks typically pay most attention to VC-backed companies. If that doesn’t apply to you, you’ll need to have $5-10 million in revenue and be very close to break-even for them to be interested.
Financial Guarantees – are you willing to get personal?
Traditional bank loans will offer low interest rates, but the banks will require a personal guarantee for your loan: if you default because business doesn’t grow as planned, the bank can go after your personal assets. And in the tech space, banks are a little skittish — they usually are looking for hard assets as security, and tech companies aren’t usually big on bricks and mortar assets or inventory. If the idea of risking your home isn’t appealing, you probably want to stick with equity funding or revenue-based funding.
Speed – how fast do you want your capital?
Timing of capital varies hugely depending on which path you choose. Go down the VC route, or even angel investors and business incubators, and you’re looking at a pretty drawn-out evaluation process, and a lot of hoops to jump through. Getting access to VC’s is very much about having the right connections – and angels are notoriously difficult to pin down. Tech banks, too, can take 4 to 6 months. While the financial infusions from these sources can be sizeable, if having extra capital on hand quickly is going to allow you to respond to new opportunities and deals, they may not be the flavor of choice.
Rather, if speed is important, revenue-based financing can put funds into your coffers within a month. It’s an entrepreneurial-friendly process that recognizes the fast-firing nature of the tech space and what’s needed to deal with time-sensitive decisions and opportunities.
Payment Flexibility – what do you want to commit to?
Of course, this question only comes up if you’ve chosen to pursue either a traditional bank loan or revenue-based financing. With the first, you’re going to be locked into fixed monthly payments, so it’s important to be confident that your revenues are now at a level you can service a bank loan without any negative impact on the bottom line.
With revenue-based financing, there’s a lot more flexibility. You’ll trade off a slightly higher cost of capital (compared to traditional banks), but in return, the level of your payment is based on a percentage of your revenue: your payments can ebb and flow just as revenues may.
There’s no one-size-fits-all answer for funding. Take the time to sit with these questions. Think about the trade-offs and how they really fit with your personal vision: scale of funding versus ownership and speed; flexibility versus cost of capital. You’ll be a bit closer to figuring out what you want to be when your company grows up.
Join Lighter Capital’s webinar on revenue-based financing September 16th to learn more about this funding option and why it works for growing technology companies.
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