Securing startup funding is one of the most daunting aspects of launching a company. It's no surprise that 60% of companies that raise a Pre-Series A venture round fail to reach Series A or beyond. The path to accessing and utilizing venture debt is complex, even for seasoned founders. However, experience can help you avoid common pitfalls and uncover opportunities to maximize the benefits of venture debt.
How to use your startup venture debt to get ahead
Expanding your founder reach and networks
Successful venture debt fundraising relies heavily on establishing strong partnerships. Experienced partners can demystify the investment process and facilitate crucial connections. Venture debt is a delicate balancing act, requiring mutual interest with the ultimate goal of forming long-term partnerships.
Tapping into Angel Investors and other founders can provide startups with a significant advantage. Fellow founders can offer warm introductions to institutional investors, while seasoned Angel Investors can help navigate complex term sheets across venture capital and alternative financing. Bringing an Angel Investor on board before engaging with institutional investors can be immensely beneficial.
Recognizing signals of genuine investor interest is key. If an investor is eager to maintain contact, ask questions, and set up meetings, it's likely a warm lead worth pursuing. In such cases, investing your venture debt resources to secure additional funding could be a strategic move.
Improving your company’s finance strategy
Using venture debt strategically can enhance your company's finance strategy as you plan for long-term survival. This involves selecting tools that can scale with your business, from 10 employees to over 100, as your company grows.
Venture debt also allows you to transition from outsourced financial services to in-house teams at critical growth stages. By refining processes and standardizing tools, you can support fast yet responsible growth. Efficient policies, procedures, and reporting from the outset are essential.
Having real-time data accessible to decision-makers is crucial in guiding business choices and securing additional venture debt. Focus on the strategic side, aligning finance, FP&A, and finops with overall company goals, and ensure clear communication with external markets. Investing in FP&A can be a valuable use of your venture debt.
Accessing more fundraising dollars
Startups can approach venture debt financing in two ways:
- Business-Led Approach: Focus on the company's immediate needs when raising funds.
- Market-Led Approach: Raise capital when market conditions are favorable, rather than when funds are urgently needed.
The market-led approach offers more flexibility, allowing funding to flow naturally from investor conversations. However, this approach may be more accessible to experienced founders with strong track records. First-time founders might need to bootstrap through growth challenges, ultimately honing their entrepreneurial skills.
Whether you choose a business-led, market-led, or self-funded approach, staying focused on business objectives will strengthen your company and open up future venture debt opportunities.
Seeking out alternative forms of financing to lower your cost of capital
A broad set of financial tools enables startups to pursue goals with precision while optimizing venture debt usage. While equity is often used for growth, alternatives like revenue-based financing or credit lines can support working capital needs more cost-effectively.
For instance, non-dilutive financing for projects that generate immediate revenue is a low-cost capital option. Combining revenue-based financing with venture debt to meet your company’s objectives is becoming standard practice, with startups supplementing venture rounds with 20-30% alternative financing.
In 2023 alone, European startups raised over €8.3bn in non-dilutive capital—more than five times the amount raised in 2016. Many founders initially view venture debt as the ultimate funding solution, but experience teaches the value of diversifying the capital structure. Incorporating alternatives to equity protects both founders' and investors' interests, with 55% of VCs either advocating for or investing in companies using alternative financing.
Ultimately, alternative financing allows for more precise financial management, helping founders retain control, raise more money, and accelerate business growth.
Investing in your product to gain more customers
Product improvements are a proven strategy for acquiring new clients, retaining existing users, and re-engaging lost customers—making it an excellent use of venture debt. You can enhance your product by adding new features or upgrading existing ones.
Upgrades and updates make your product more advanced and tailored to your customers' business needs and pain points, thereby strengthening your value proposition and expanding your customer base. These improvements also reduce churn, build brand loyalty, and drive value for current customers. While innovation and risk-taking are involved, a well-structured product improvement plan increases your chances of success.
Removing bottlenecks from your hiring
Early founders often spend over 40% of their time on recruiting, which can become unsustainable as the company grows. Using venture debt to hire a recruiter with a broad talent network can establish a consistent and repeatable recruitment process across your teams, proving beneficial in the long run.
Effective communication is key to maintaining top candidates' interest in a competitive market. A recruiter can handle this, freeing you to focus on growing your business. Early hires significantly shape company culture, so it's critical to avoid hiring bottlenecks, question inefficient recruitment processes, and focus on hiring the right talent at the right time without compromising standards.
Especially in these uncertain market times, it’s especially important to focus on retaining your current top talent while continuing to attract the best new candidates for the open roles in your SaaS organization. Using your venture debt to expand your headcount and make your recruiting processes more efficient pays off long-term.
Your primary goal in accessing venture debt should be to grow your business, reduce costs, and improve profit margins. Prioritizing these areas, along with strategic planning and data-driven decision-making, will help you achieve your objectives and maximize the benefits of venture debt.
