The importance of debt in a changing startup funding environment

Think startup funding, and equity is the first thing that comes to mind. However, equity (raising capital in exchange for equity) is not the only mode of funding for startups and emerging businesses. 

So what if founders need to raise capital to grow their business without letting go of their equity further? Enter LV Debt, a pure-play debt solution to provide working capital to help emerging businesses achieve their next stage of growth. 

Alternative forms of funding, including debt, have seen a huge rise in demand in the last couple of years. 

Unlike the loans provided by conservative institutions like banks, LetsVenture is uniquely positioned to offer debt funding according to the needs of startups, emerging businesses, and founders in mind. 

As the equity funding market takes time to gain ground, debt as well as the combination of equity and debt rounds are expected to become a strong funding instrument in the coming years. 

Is debt for all?

Not all startups or emerging businesses should raise debt. It is not everyone’s cup of tea. 

As a founder, if you cannot forecast your startup’s revenue or think you can defer the burden of this debt to future investors, do not raise debt. One should also not blindly resort to debt just because you cannot raise equity. 

However, with a good strategy in place, raising debt can help unlock significant growth for your business. 

A good time to start strategizing for debt is when you have successfully navigated the early stages of building a business, and cash flow for the business is more predictable and stable, and the startup is well on its way to having positive unit economics. 

Finally, take debt only when it can be at least partially funded by your cash flows. In such cases, raising debt often becomes a cheaper option than raising equity. 

Some of the most successful startups like Ather Energy, BigBasket, Swiggy, and BluSmart, among others, have leveraged debt and alternate forms of funding to scale successfully. 

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Raise debt at the right stage and time and it can positively impact your startup in the following ways:  

Preserve equity: Founders must be judicious about startup equity and dilute it sparingly. When you give away too much equity early in the journey, you risk losing control over critical decisions regarding growth direction, business strategy, and leadership of the company. 

When you raise debt, startup equity remains intact and so does your ownership and control in the business. 

Retain valuation: A lot of fundraising discussions between founders and investors hinge on valuation. Even after all other aspects of the business are sorted, disagreements regarding the ‘fair value’ of a company become a hurdle in closing the deal. When raising debt, which is essentially a loan that needs to be repaid, it does not affect the intrinsic value of a company. 

Unlike equity investment, debt investment does not change the ownership structure of the business. The business is solely responsible for making sure the debt is repaid in the stipulated time. 

Debt funding can help extend the runway to avoid downrounds during funding crunch and delay equity funding till the market is more favorable. 

‍Working capital for growth: Taking debt is a good way to fuel growth, whether it is expanding operations, launching new products, or strengthening your market presence. By using borrowed funds, startups can amplify their resources without giving up ownership, especially when the founders believe they can generate a higher return on the borrowed capital than the cost of the debt.

(A pioneer in democratizing private markets of India, LetsVenture, through its new product LV Debt, aims to meet the growing demand for alternate forms of funding across stages of a startup's life cycle. Watch this space for more updates on LV Debt.) 

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