What Source of Funding Start-ups Should Choose After Raising Series A?
Entrepreneur's New Year’s Guide
You're reading Entrepreneur India, an international franchise of Entrepreneur Media.
Fundraising is an indispensable part for start-ups. A common dilemma that besets founders is that of choosing between debt financing and equity financing while raising funds.
Debt Financing vs Equity Financing
At the fundamental level, debt financing refers to raising funds vis-a-vis debt. Raising funding via debt has its fair share of pros and cons. Start-ups raise funds through debt funding from investors with the assurance of repayment with added interest. While one’s ownership remains intact, a lot of assets can be at stake as collateral.
Equity financing, however, is just the opposite. It is the process of raising capital through the sale of company shares. The biggest reason why equity financing is considered risky is because the control of the founder or the entrepreneur in his/her start-up gets compromised. But it is considered a viable option because one can raise much more capital via this source. Also, founders are at ease because, simply put, there is no pressure of repayment.
What to choose and when to choose could be, however, difficult to decipher.
What Happens Post Series A?
When a company raises series A funds, it implies that it has reached a crucial juncture. Another reason why this round of funding is an important milestone is because it marks the company’s shift from concept stage to operations stage. The actual task of running the company and putting all the ideas into action start after series A funding has been raised.
Ankit Sharma, director of Trifecta Capital, says founders are not really aware of the benefits of venture debt. He says, “Debt is something every founder should look into when he crosses the series A stage.”
He adds, “If a company is raising $10 million, it should consider raising a couple of million through debt.” The major advantage of raising funds via debt, he says, is extended cash run rate. The second advantage is that venture debt is more dilutive on the equity side, according to Sharma, “The promoter can save his equity dilutions which he can use to value at a later stage.”
Balance is the word of action here.