> SO if a startup is too risky for VC capital, 9 times out of 10 they are too risky for debt as well. Any startups who think they have loans as a backup option if they can't raise their next round are in a for a tough wake up call.
Reminds me of the one startup we once partnered with that were entirely bank funded through a major R&D effort. I'm still in awe at the financial discipline it took them, given that the bank released money in tranches equivalent to what he needed for 1-2 months at a time, entirely contingent on meeting extremely narrow performance targets to convince the bank they were on track and still met the risk profile. Mess up the slightest little bit even one month, and they'd be totally at the mercy of their bank manager. The bank saw it as borderline in terms of their risk.
Meanwhile, if they'd gone to a VC with the business in the state it was in, the VCs would be metaphorically throwing stacks of money at the company.
Traditionally debt has been seen as the cheaper way to capitalize a business. It's just that start ups are terrible credit risks and had no ability to get loans. Obviously every situation is unique. The freedom of a lot of money now might be worth giving up equity, especially in a market where first mover is so significant.
But if you use debt, all the upside is yours.
I still think debt is better, especially because a lot of equity comes with with debt-like terms like liquidation preferences. So it's basically the worst part of debt and equity combined.
Reminds me of the one startup we once partnered with that were entirely bank funded through a major R&D effort. I'm still in awe at the financial discipline it took them, given that the bank released money in tranches equivalent to what he needed for 1-2 months at a time, entirely contingent on meeting extremely narrow performance targets to convince the bank they were on track and still met the risk profile. Mess up the slightest little bit even one month, and they'd be totally at the mercy of their bank manager. The bank saw it as borderline in terms of their risk.
Meanwhile, if they'd gone to a VC with the business in the state it was in, the VCs would be metaphorically throwing stacks of money at the company.