Want to Grow? Consider Multiple Funding Sources
Utilizing both equity and debt capital is going to become more and more common. With equity funding still difficult to obtain — and a lengthier process overall — due to current and future economic concerns, more SaaS companies have turned to venture debt to bridge the gaps in their funding and to maintain progress on growth goals. Equity deals are still closing, but this funding source is not as plentiful or readily accessible as it was in late 2021 and early 2022.
SaaS companies that are considering equity-based funding or that already have VC or equity investors in place should be proactive in understanding how equity and debt capital can work together to support financial goals. Here, we’ll explore a few examples of how these two funding sources do exactly that.
Get to the bottom line: Learn how equity and debt compare side-by-side.
1. Extending Your Runway
One of the most common reasons to combine equity and debt capital is to maximize the number of months until your cash runs out. You might have received a strong cash injection from an earlier equity round, but as time progressed — and customers began to evaluate their tech spend — that cash began to run low. Depending on where you stand in your growth, it might be some time until your next round. And, to complicate matters, equity investors are now more conservative and cautious than ever thanks to rising rates.
2. Reducing Churn
The capital from equity investors is meant to assist not only with growth but also with a variety of operational and financial needs. Thus, you’ll be using it for multiple purposes. Debt, on the other hand, is most ideally suited for accelerating growth. One of the best ways to do this is by focusing on reducing your churn rate. There are two straightforward ways to achieve this: acquiring new customers and improving the retention rate of existing customers. Venture debt is ideal for these goals because it allows you to invest in sales and marketing as well as customer success initiatives while equity funding is primarily used for CapEx or other operations.
3. Managing Dilution
It’s nearly impossible to grow a startup today without outside equity and debt capital. As you know, equity funding will result in dilution of your ownership. This is inevitable and unavoidable if you want to use this funding source, but the key is managing how much your ownership is diluted and when. In between raise rounds, debt provides you with the capital you need to keep moving forward how you want, without having to give up more of your ownership. The capital can be used flexibly, too — if cash flow becomes a challenge, scale-up efforts can be deprioritized and revenue can be used to repay the debt.
4. Maximizing Valuations
While valuations are trickier today than they have been over the past couple of years, SaaS companies are still on the leading edge of digital transformation, and companies need their services to achieve their respective goals. Thus, obtaining a strong valuation during equity rounds is still a focus for leaders. Venture debt plays a key role in this in that it gives you the capital you need to achieve significant progress between rounds and command a stronger valuation. Learn more about this and other related uses for debt here.
Get the Best of Equity and Debt Capital with River SaaS
As one of the most flexible and supportive lenders for this industry, we understand that equity and debt capital both have a meaningful part to play in a SaaS company’s growth journey. That’s why we offer both — venture debt financing that can be tailored to your growth goals and equity financing that enables you to achieve other key objectives. Many of our portfolio companies have used both funding sources with great success.
Properly combined, SaaS businesses can maintain progress toward their goals while also accelerating the key business functions that enable them to scale faster. On the debt side, we are unique in that we don’t take warrants — ensuring you retain true, complete ownership without the possibility of having to give up stock in your business. We also don’t require you to be profitable or to have an exit strategy in order to qualify for funding. Learn more about the advantages of working with us for debt financing.
If you’ve been considering how equity and debt investments can work together for your business, get in touch with our investment team. We’ll learn more about your business and how we can help you achieve your goals.