99% of companies need more than one kind of capital to succeed. The notion that successive rounds of equity can (or should!) fund most kinds of companies from concept to scale, at the exclusion of other forms of capital, is farce.
Look to the stats for reinforcement: Fewer than 7% of the companies on the INC 5000 list have raised VC dollars. 400. That’s it. How are the other 4,600 companies on that list capitalizing growth? Beyond early equity, these companies are using revenue, debt, credit, savings, strategic partnerships, customer financing, sponsored R&D, manufacturing deals, grants, contracts, competitions...the list goes on.
If the world is filled with a variety of capital tools, and most healthy companies are using them, why do startup educators, mentors and investors rarely seem to mention them? Why is everyone so obsessed with teaching founders how/when/where to chase venture?
Let’s break it down.
There is a reason why programming for early entrepreneurs focuses on raising equity. For pre-product, pre-market, and/or pre-revenue companies, it’s angels, friends, family, and platforms like accelerators that offer up access to resources. These sources are, with but a few notable exceptions, operating with equity-based models.
Equity is a fine tool for creating new value. It’s speculative, relatively patient capital that will “wait it out” for significant downstream outcomes. Out of the gates, most founders need just that kind of money. Learning how to get it, use it, and what having investors means for a company is worthy of study.
Unfortunately, that’s where the capitalization curriculum ends.
Equity is not a great tool for everything. Using equity for short term capital needs, inventory, or other “incremental” purposes gets expensive, hastens/deepens dilution, and challenges company leadership to manage investors who are motivated, above all else, toward exit and/or the next raise.
The dearth of dialogue around non-equity tools is made worse by reality: most companies are not venture scale, which makes raising *successive* rounds easier said than done. After early equity has been raised, getting more may take longer, come with less agreeable terms, or not happen at all. Seed and Series A rounds are currently in a downturn since peaking in 2015-6.
If the vast majority of the world’s companies are using more than equity to grow, why is no one talking about it?
It’s easier. Getting familiar with the nuances of multiple types of capital takes time, work, and ongoing education. Hard to compress that into a 45-minute fundraising workshop at your local startup cafe.
It’s sexier. You will NOT be interviewed by TechCrunch when you close a revolving line of credit to fund inventory, although your customers, and your bottom line, will thank you.
There’s little incentive for the equity investors who run the startup machine to talk about products they don’t sell. You wouldn’t go into an Apple Store to look for an Android phone.
For founders--especially the first-time variety--the myopic focus on equity fundraising delays the necessary and hard work of building a dynamic capitalization plan, one that supports growth and flexibility long-term.
As for advice I give founders looking to broaden their thinking around capital, I offer these suggestions:
1. Change Your Language.
Don’t say “How will I fundraise for my business?” Instead, ask “How will I capitalize my business?” With just a turn of phrase, you open your mind, and the conversation, to much greater optionality. Remember, strategies start with ideas, which are shaped in our minds by the words we use to describe them. Never underestimate the power of semantics, especially when it comes to how you talk to yourself, your team, and your advisors.
2. Find a Capital Mentor
Connect with someone who has built a business like the one you are building. Someone who understands the the financial tools of that industry. This is standard operating procedure for more mature companies, and I am always the befuddled why we delay bringing this resource into companies earlier on. Seriously.
3. Educate Yourself Now
There are plenty of issues competing for attention. Sometimes all we can do is focus on customers, product, and getting those first sales on lock. But sometime soon after that, get wise about what options may be available as you continue to grow. In the last few years, there has been an emergence of alternative capital tools. Not all are created equal, and not all will be right for you. But playing possum won’t help you figure out what is.
4. Understand Your Cash Flow
On paper, transactions often appear linear: for example, if you put $X number of dollars into acquiring a customer, they spend $X dollars over time. While this may be true from an accounting perspective, there are important nuances to this equation. What is the length of time between those two things? Is it predictable, or is it unpredictable? What cost do you need to “front” while awaiting dollars from a sale to materialize? What part of this is funded through burn?
There are no wrong answers, just bad plans. If you discover that there is a cash flow challenge / opportunity in your business, you may be able to fund that through something other than equity. Which in the long run, is likely a less expensive and more advantageous choice. Alternatively, if you miscalculate cash needs at a significant enough scale, your equity dollars may burn out faster than anticipated, putting you in the unenviable position of raising capital while under duress.
5. Make Revenue a Priority
Even if your plans are to pursue a venture-scale, equity-enabled exit, the benefits of building revenue early are multifold. But for this post, I’ll focus on just one word: sustainability. A company with revenue and profitable unit economics has a longer runway. While you may need / want capital to boost grow and take advantage of opportunities, more runway means making capital choices by quality of fit, not by desperation. And that my friends is a nice place to be.
About the Author
Melissa Withers is an experienced fund manager and business builder with investments in 90+ companies. She is currently Managing Director of RevUp Capital, a fund focused on B2B and B2C companies moving fast up a revenue-fueled growth curve. As a mentor and advisor, Melissa works with companies on marketing, brand position, ecommerce, enterprise sales, and planning for organizational scale. More at revupfund.com