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  • Writer's pictureBenjamin

๐—œ๐—ป๐˜ƒ๐—ฒ๐˜€๐˜๐—บ๐—ฒ๐—ป๐˜ ๐—ผ๐—ป ๐—ฌ๐—ผ๐˜‚๐—ฟ ๐—ง๐—ฒ๐—ฟ๐—บ๐˜€

Updated: Oct 28, 2023


Initially, I titled this post, "Founders: Avoid Investment" but then I realized thatโ€™s more provocative than helpful.


Raising money can solve critical problems by providing the capital to fuel exponential growth, attract talented employees, and cover expansion costs.


However, it may also introduce new challenges related to management control, equity dilution, and reporting requirements.


This post explores four viable options, along with the pros and cons of each. Let's grow!



Revenue-based financing offers capital in exchange for future earnings and can be good if you have a predictable, growing revenue stream.


Pros

  • Retain ownership and control

  • No personal guarantees needed

  • Faster funding

Cons

  • Requires recurring revenue

  • Limited to past sales usually

  • Can be more expensive than traditional loans



Strategic investments made from companies in the same or related industries can be an excellent way to gain traction and insight.


Pros

  • Improve access to the investor's market

  • Scale easily in some areas (e.g. sales and marketing)

  • Gain industry knowledge and partners

Cons

  • Can create a potential conflict of interest (e.g. exclusivity)

  • Investors may want right of first refusal on an exit

  • May not have aligned interests (e.g. want to acquire vs. grow the business)



Equity crowdfunding raises capital from countless individual investors and pools those funds through online platforms.


Pros

  • Great fit if thereโ€™s an emotional appeal

  • Can find market validation and early virality

  • No debt or loss of control typically

Cons

  • Time-consuming and challenging to break through the noise

  • Platform fees

  • Strict federal and state filing requirements



Debt financing offers lots of ways to borrow money. For any means, consider availability, cost, collateral, and speed when deciding.


Pros

  • Retain ownership and control

  • Faster funding

  • Can scale pretty easily

Cons

  • Obligation against personal assets

  • High-interest rates

  • Collateral requirements may slow down process



Types of debt financing


Venture debt can offer less dilution, lower interest rates, and faster turnaround. However, it may also have financial covenants and higher interest rates (especially if it's is required as part of a larger deal).


Convertible debt can support growth with little cost or time upfront. However, you donโ€™t know the companyโ€™s future valuation, so you risk offering equity at a deep discount and investors may want attention.


Asset-based lending is secured by assets, such as inventory or accounts receivable. It can be easy and fast with few restrictions, but you risk fluctuating capital and high interest rates.



There are many options to inject cash into your business but consider tradeoffs across dilution, risk, cost, and opportunity.

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Photo by Matthew Osborn who can be found here.


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