In the highly venture-funded Israeli startup ecosystem, where entrepreneurs often rush to raise a lot of fundraising every 2-3 years, equity dilution may seem like the best route for realizing ambitious ideas, and sometimes they are. But the picture is a bit more complex than that, and entrepreneurs should be aware that they have another option – one which may be better suited to their goals and which may be a cheaper source of funding in the long run.

Startups need to keep in mind the long journey ahead. The more a business grows, the more a scalable funding source and debt strategy become necessary. Startups that generate significant income and cash flow, and are confident in their future fundraising, should consider venture capital debt as a solution. This article aims to highlight both types of equity and debt financing, so that you can make a more informed decision at the right time.

Equity financing

Raising equity means that you give away some of the ownership of your business in exchange for funds to keep you up and running while you are in pre-income or your monthly usage rate increases.

Options for raising capital include accelerators, angel investors, venture capital, private equity, enterprise venture capital, family offices, and other non-traditional forms of equity financing.

It is important to note that venture capitalists and investors generally expect a return on investment of three to five times greater than five years. If your projected growth rate is different, you may want to consider other forms of financing.

Venture capital debt

To some extent, we all know about debt. At some point, we’ve probably all had at least a student loan, a credit card, or a car loan or lease. Debt means you take out a loan. When it comes to your startup, the most obvious benefit of using venture capital debt is less dilution and more flexibility in spending. Your business is under your control. Your assets remain intact. The founders make the decisions and keep the profits.

The risky debt market is growing rapidly

Many entrepreneurs shy away from the word debt, but for venture-backed companies that already have initial income, the benefits can far outweigh the risk. Typically, you can use venture capital debt to increase liquidity or prolong the burn, or to fund certain assets. According to Pitchbook, in the United States, venture capital debt is growing faster than the larger venture capital market.

Banks offering subprime loans accept commercial guarantees, but once they provide the backing, they are usually there for the long haul, and even in the event that the business encounters a bad patch, they will be there to offer. the best solutions to get you back on track.

Achieve a value milestone

For startups, certain financial milestones, such as $ 5 million in annual recurring revenue, create a variety of new investment and exit opportunities. Venture capital debt can give startups the wiggle room they need to reach a key value milestone before increasing that next round.

In addition, the startups that raise a fundraiser go into debt at the same time, ensuring that their equity becomes more efficient. This is very beneficial for entrepreneurs looking to grow faster without having to dilute their holdings at every turn. Typically, equity raised with a layer of debt opens up more options for higher valuation on exit or IPO.

Summary

Tech companies, whether they measure success through service subscriptions, revenue recognition, or SaaS metrics, should add a potential debt strategy to their plans. It’s also important to keep in mind that you can take a hybrid approach to financing, leveraging both equity financing and debt financing.

Guy Navon is the head of Discount Tech.