I think you guys are both right. And I'm sure one could construct some sort of venn diagram for startup funding with circles for equity, debt and bootstrapping; where a given startup is a good match for one or more funding choices (based on its biz model, industry, geography, founders, etc..).
(By the way congrats on financing your Series B with revenue, that is awesome!).
Just wanted to add one point in the equity vs debt debate is 'in theory' once a startup gets big enough doing the math on choosing equity or debt is very different. Once a startup is a real company and reasonably calculates how much money it needs and what it expects to earn on that money, an "optimal" capital structure calculation starts to emerge [1] and VCs and banks will compete for your business.
For a healthy, growing startup, if selling a certain % of your equity to a VC looks unattractive compared taking out a bank loan then your equity valuation is being mispriced here. Negotiate it. Conversely if a bank loan looks unattractive compared to VC equity offers (because the bank's convenants are too burdensome and your monthly interest/principal payments pull too much cash away from your growing business then the lender is mispricing your borrower risk). Negotiate it.
To follow on the Facebook example above, I believe they started mixing equity and debt almost immediately as early as 2004 [2]. Their seed investors backed their credit line (WTI invested $25k in equity and provided a $600k credit line). Later, FB took on $100M in debt from TriplePoint about the same take they sold .08% for $120M ($15B post). If you do the math here, then diluting ownership by .08% for $120M that you don't have to pay back vs. writing checks for $150M to pay back a loan over the next few years, the equity starts to look pretty attractive.
(By the way congrats on financing your Series B with revenue, that is awesome!).
Just wanted to add one point in the equity vs debt debate is 'in theory' once a startup gets big enough doing the math on choosing equity or debt is very different. Once a startup is a real company and reasonably calculates how much money it needs and what it expects to earn on that money, an "optimal" capital structure calculation starts to emerge [1] and VCs and banks will compete for your business.
For a healthy, growing startup, if selling a certain % of your equity to a VC looks unattractive compared taking out a bank loan then your equity valuation is being mispriced here. Negotiate it. Conversely if a bank loan looks unattractive compared to VC equity offers (because the bank's convenants are too burdensome and your monthly interest/principal payments pull too much cash away from your growing business then the lender is mispricing your borrower risk). Negotiate it.
To follow on the Facebook example above, I believe they started mixing equity and debt almost immediately as early as 2004 [2]. Their seed investors backed their credit line (WTI invested $25k in equity and provided a $600k credit line). Later, FB took on $100M in debt from TriplePoint about the same take they sold .08% for $120M ($15B post). If you do the math here, then diluting ownership by .08% for $120M that you don't have to pay back vs. writing checks for $150M to pay back a loan over the next few years, the equity starts to look pretty attractive.
[1] Optimal Capital Ratio: One might disagree with how this is done or what it means but calculating an optimal capital structure is a thing: http://pages.stern.nyu.edu/~adamodar/pdfiles/acf2E/presentat...
[2] FB made some good choices early. I wonder how much equity and advise from Thiel played a factor: http://dealbook.nytimes.com/2012/02/01/tracking-facebooks-va...