What’s your fundraise source and structure?

Below is the “Tip of the Week” transcript from the Podcast Episode 18: Fundraise Types, Sources & Structures (Dave Berkus)
So, while we didn’t have time to review the 30 some-odd structures from Dave’s book, Extending the Runway.  I did want to highlight six of the structures we discussed and who they are often used by.  This is not an exhaustive list, but should provide a good overview of the more common funding types.

1.  Equity:  Great for the fast-growing, scalable startup

  • Category includes:
    • The standard priced-round… transfer of equity at an agreed valuation (either preferred or common)
    • Warrants
  • Sources:
    • Friends & Family
    • Venture Investors (Angels, VC’s, accelerators and, in some cases PE)
    • Crowdfunding Platforms… albeit currently it’s not open to the unaccredited in the U.S. due to the JOBS Act not being yet fully executed)

2.  Debt:  A good option for companies that have strong cash flow, but don’t want to give up equity or don’t have an opportunity to scale and have a large exit

  • Category Includes:
    • Loans, repaid with an interest rate
    • Often require a personal guarantee (ie. if the business fails, you still have to pay it back)
  • Sources:
    • Home equity loans or lines of credit
    • Credit Cards
    • Banks
    • SBA (small business administration)
    • Venture Investors (Angels, VC’s, accelerators and, in some cases PE)
    • Online P2P and other debt-funding platforms

3.  Hybrid Debt/Equity:  Often makes sense for very early-stage companies, bridges, deals that need to be done quickly, or situations where there is a high-degree of uncertainty in future valuations.

  • Category Includes:
    • Convertible Debt
    • SAFE’s
    • Loans w/ Warrants
    • *New (not originally in episode): Convertible Debenture:  Similar to a Convertible Note except that the borrower is required to make payments, at defined periods, over the term of the note.  The lender, in this case, receives payments, like a loan, but reserves the option to convert to equity if a qualifying event occurs
  • Sources:
    • Venture Investors (Angels, VC’s, accelerators and, in some cases PE)
    • Crowdfunding Platforms

4.  Asset-based lending:  Makes sense when one wants to retain as much equity as possible, has short-term cash needs and is confident in their ability to repay… although terms here can be costly

  • Types of Assets to lend against:
    • Equipment
    • Inventory
    • Accounts Receivable
    • Contract-based (ex. Lease-term financing or Purchase Order financing)
    • IP
  • Sources:
    • Asset-based lenders
    • Banks

5.  Royalties & Licenses:  Can help to finance efforts in core markets while giving others access to non-strategic markets.  In the case of royalties, they are tied often to sales, gross margin or net margin, so they should only increase as the business grows, which can reduce strain in early-stages.

  • Sources:
    • Venture
    • Strategic Corporate Partners
    • Competitors, distributors or similar players in other Geographies
      • ex. With one of the startups that I’ve invested in, there was a recently opportunity to provide an exclusive license for all rights to sell a product in India in exchange for an upfront payment

6.  Grants/Gov’t Funding:  If the startup meets the criteria, it is a great way to obtain financing without giving up equity… although does require adherence to certain processes and deliverables.

So, before your startup, or a startup you are coaching draws up a PPM and begins raising capital, it may be worthwhile to take a step-back and review the options available, the sources in each and which makes the most sense for the type of company and the stage they’re at.