Updated: May 9
By Doug Zeisel, TCV Growth Partner-
Before you waste time looking for Venture Capital funding to fund your company’s growth, please consider the following important considerations:
First, it is important to match the funding you are seeking to the stage of commercialization (growth) of your company. How many times have we heard a start up founder saying they would raise $10M from a Venture Capital firm when they were still proving their concept. Totally out of touch. Maybe after three more years of product development and proof of concept via sales growth, maybe then could they attract VC funding. Maybe. There is a commercialization funding pathway that entrepreneurs need to be aware of as presented below. So please understand where you are in the commercialization process before you start looking for $$.
Please note that some of these sources may overlap at various stages of company growth.
For a deeper discussion of each funding stage, see TCV Partner Gary McDaniel's article - Financing Your Business - Funding Stages
Further Funding Considerations
For Tech companies in the Pre-Seed stage, the absolute best source of funding are grants because you do not give up equity to get those funds. Instead, you must do work to further R&D that you would do anyway. And another benefit is that the grants typically require that you do further market research via “customer discovery”.
Next, It is well worth considering the old adage, “keep it small and keep it all”. This idea is not particularly relevant to the idea of building a business that can scale into something that can provide a handsome exit for investors. However, the saying is well worth considering in relationship to how much of your company you are willing to give up to get growth funding. This is especially true of companies that can self-fund growth past the launch stage. Why? Because you won’t give up a significant amount of ownership in return for the funding you really don’t need. How do you know if you should forgo seeking VC funding? Some considerations – Does your product (or service) have high gross margins and significant pricing power? Is the ultimate scale of your business smaller than the $50M plus that VC’s are looking for? Do you mind going slow and retaining all of your ownership? How long will it take to get to profitability?
Remember, if you can be profitable early, then you can borrow from a financial institution (bank or other) at a much lower cost of capital. Hmm, we better review Cost of Capital.
The cost of capital is how much you pay to get it. For example, the cost of capital is very low for a loan from a bank vs. very high for equity investment. The reason is that bank loan cost is merely the interest rate you pay on the amount borrowed – typically 8-10%. But the cost of capital for equity is the percentage of your ownership you must give up to get those funds – typically 25 to 40% for the first round. So why not keep that equity and be able to run your business without someone always looking over your shoulder?
On the other hand, here is why you might want to go the VC route – if the ultimate scale of your business is in the hundreds of millions of dollars, then owning say 10% might be well worth it if it goes IPO for $500M. That 10% gives you $50M – not a bad retirement. But please be realistic, how many start up tech companies actually make it to an IPO?
So what are your options to fund later stage growth without giving up equity?
SBA Loans – for companies that can’t get a traditional bank loan, the US Government Small Business Administration (SBA) has a loan program that will guarantee a bank loan for qualified borrowers. Learn more HERE.
Factoring Receivables – this very expensive option is available for companies with growing revenues but who do not have three years of profitability that bankers generally require. Factoring companies typically charge 5% of the invoice value that they fund. Advantage – you get paid within 5 days of creating a valid invoice. Disadvantage – it’s a huge bit to profitability. So receivables financing is best used by companies with high margins and growing sales. Learn more HERE.
Purchase Order Financing – Great for companies that need supplies or raw materials to complete a sale to a customer, and the company doesn’t have available cash (or inventory) to buy the supplies or materials needed. Click HERE for more info.
Over the past few years, many "on line" financing options have become available which you may want to explore. A great place to research for other options is available at Bplans.com.
If you need help figuring out the best way to finance your growth, don't hesitate to reach out to me or one of our partners:
For Bank Loans - Dave Costello
For Info VC funding - Gary McDaniel
Feel free to make suggestions for additional information.