In the heavily venture capital-funded Israeli start-up ecosystem, where entrepreneurs often race to raise numerous rounds of equity every 2-3 years, equity dilution may seem the best route for realizing ambitious ideas, and sometimes it is. But the picture is a bit more complex than that, and entrepreneurs should be aware they have another option – one that may be better suited for their goals, and which can serve as a cheaper source of financing in the long run.
Startups should bear in mind the long journey ahead. The more a company grows, the more a scalable source of financing and debt strategy become necessary. Startups that generate a hearty amount of revenue and cash flow, and are confident in their future equity fundraising, should consider venture debt as a solution. This article aims to highlight both types of financing equity and debt, so you can make a more informed decision when the time is right.
Options for raising equity include accelerators, angel investors, venture capital, private equity, corporate venture capital, family offices, and other non-traditional forms of equity-based financing.
It’s important to note that venture capitalists and investors generally expect a three to five times return on their investment within five years. If your projected growth rate is different, you may wish to consider additional forms of financing.
The venture debt market is growing fast
Banks offering venture debt do take business collateral, but once they provide the backing, they’re usually in it for the long run, and even in the case the business encounters a rough patch, they will be there to offer the best solutions to get you back on track.
Reaching a Value Milestone
Moreover, startups raising an equity round take on a layer of debt at the same time, ensuring their equity becomes more efficient. This is highly beneficial for entrepreneurs seeking to grow faster without having to dilute their holdings at every round. As a rule of thumb, equity raised with a layer of debt opens up more options for a higher valuation at the exit or IPO.
Tech companies, whether they measure success through service subscriptions, revenue recognition, or SaaS metrics, should add a potential debt strategy to their plans. It’s also important to keep in mind that you can adopt a hybrid approach to financing, leveraging both equity funding and debt financing.