Think Debt First, Then Equity

The large majority of CEOs we speak with find themselves in the search for equity, but surprisingly they typically have not fully considered their debt options.  I think this is likely the case because of the prevalence of private equity and venture capital firms out there, but I like to remind CEOs and CFOs of the great benefits of debt.  First off, although debt comes with covenants, it doesn’t come with one more boss sitting around the directors table.  Secondly, it’s less expensive because you don’t have to give a piece of yourself (your company) to them.  And lastly, it can actually help you become a better business operator by instituting fiscal discipline and ensure you generate your cash flow to support debt service payments.

A few months back, I spoke with a bright, experienced, successful CEO who became very agitated when I mentioned the words “venture capital”.  My colleague and I listened to her rant about the various reasons why she preferred not to ever deal with venture capital investors, and we left the call thinking to ourselves, “that woman had it right.”  She was smart, she had the right people around her and she knew exactly what created value for her business.  As we’ve heard from various CEOs, venture capital investors are frequently reactionary and are not thinking about building a business for the long term, instead they think about their exit and achieving IRRs for their LPs. Despite these misaligned incentives, many executives feel as though they don’t have better options because of their company’s current financial standing and/or lack of real assets.

Debt investors have gotten creative and now offer solutions for emerging growth companies that traditional banks do not.  For example, companies that have a strong track record of consistent monthly revenue growth can tap into cash flow lenders willing to look more at the top line than the bottom line.  These lenders can also move quickly, evaluating a business in a matter of days and closing in a couple of weeks.  And for those companies not yet hitting their stride on the top line, they should think about various venture debt options, accounts receivable or inventory financing, or business credit cash advances.  CEOs should get creative on the debt financing side and preserve their equity ownership.  

As I’ve mentioned in previous articles, there’s nothing sexier to an investor than an operator that can execute.  Execute, execute, and execute and you will dramatically increase your odds of having various funding alternatives offered to you.  Avoid the hype of having a marquee investor name on your web site or board and focus on what really matters – execution and revenues.  If you do this well, numerous financing doors will open up, and you may be surprised to learn that some of them are much more palatable than the equity alternative.  So get out there and make it happen.

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