You did what? Why we chose debt over venture capital

money-keithcooper

Money photo via Keith Cooper

If you’re an entrepreneur, there’s a good chance that many of your conversations — and a good chunk of your inner dialogue — are consumed by thoughts of fundraising. You can’t open a web browser or email or Twitter without being bombarded by opinion pieces, research, case studies, and news on the topic.

On this site alone, searches for “fundraising” and “venture capital” return hundreds of results.

Questions like the ones below run on a continuous loop in your mind:

Who should you try to raise money from?

When should you raise?

How much should you raise?

What valuation can you get?

What will the funding do for you?

What will it do to you?

And what will happen if you can’t raise money?

I spent several years alongside LiquidPlanner’s founders as they wrestled with those questions. From where I sat, it seemed like they did pretty well. Then when we changed things up last year. Fundraising was topic #1 all over again. The business was five years old and recently profitable. We were well past the seed/early stage milestones. We were ready to step on the gas.

Liz Pearce

Liz Pearce

On one hand, the signs telling us to raise venture capital were everywhere. The product was getting great traction with customers. The team was solid. Our addressable market is huge. Looking at the key performance indicators it was easy to envision a path to serious growth.

Then there’s that pesky other hand.

The project management space is also crowded and volatile and uncertain. Our main competitors are heavily funded, and they have been for a while. The hiring market in Seattle, especially for developers, is brutal, and like everyone else we desperately need technical talent.

Could we afford to raise VC money? An equity raise wouldn’t come without huge costs: time, energy, distraction, travel, dilution, control, culture, artificial pressure.

On the flip side, could we afford not to? You’ve heard the same horror stories I have, of perfectly good companies either getting trampled to death or withering into the abyss.

You see where I’m going here – these are tough choices. After a long time turning the problem over and over, we landed on an option that most people didn’t expect: we raised a debt round.

Instead of going out for an institutional round (the presumptive next step), we decided to borrow the money we need to grow. This borrowed money certainly comes with its own set of costs: interest, fees, legal expenses, and other overhead. It must be paid back. And it comes with financial covenants that must be met (or else….)

But what the debt is allowing us to do is pretty compelling, too.

With minimal dilution, we are investing in growth—hiring the people we need to execute on our strategy and funding new customer acquisition programs. We only borrow as much as we can efficiently put to use, no more. And we do it while staying 100% focused on running our business.

From time to time, when I think about what it would have meant to go the VC route this year, I have a bout of FOMO (Fear of Missing Out). Then I remember a core belief of ours that helped lead to this decision in the first place. If we can hit our milestones efficiently with investor money, then we should be able to do the same with our “own” money.

Trying to grow aggressively with debt funding requires discipline, focus, and really hard work.

But I subscribe to the Christian Chabot school of thought, so that’s just fine with me.

We also know that the next time fundraising becomes topic #1, we may come down on the other side of the fence. For today, we’re right where we want to be.

Liz Pearce is CEO of LiquidPlanner, a Seattle online project management startup. You can follow her on Twitter @lizprc.

  • http://twitter.com/workstreamz Anand Chittoor

    Great insight Liz. Thanks for sharing. FOMO is my primary concern that your debt over VC option addresses. You then live for someone else and your core beliefs can be compromised.

    Ideally, your business should turn in profits before you add debt but that never happens, right;).

    Anand.

  • http://www.facebook.com/lizprc Liz Allen Pearce

    Thanks, Anand, for the feedback. We were profitable last year so I think the time was right.

  • DS

    . If you get a SBA loan you need to be careful. If the SBA only plans to file a collateral position on the RE then great. But, if they also plan to file a collateral position (UCC) on other business assets then there will potentially be an issue for other lenders. If they file an “all asset” lien that would include your AR, Accounts, general intangibles, and proceeds of Inventory – which are the items that make up a receivable and are what you would need with a first collateral position on in order to get a loan on receivables. Sometimes you need to get a loan if you need extra cash between manufacturing and shipment of a order and receipt of the funds from the customer. Sometimes the SBA will tell folks they will still file an all asset lien but “subordinate” to another lender for a working capital line. Don’t listen to this – that process takes literally months and months for them to evaluate and get done. They do decisions in 60 day increments some businesses wait for a yr. to get the release. This could hurt your expansion of your business.