Use of Funds | Aug 28 2020
Funding Timeline of a Tech Startup
When your company hits new levels of growth and you approach new milestones in your company journey, it’s important to understand the funding options available to you.
Initially the vast majority of funding available will be through equity, an option that can prove to be costly in the long run due to dilution of ownership and control.
However as a technology company grows it becomes less and less reliant on expensive and dilutive equity to fund continued growth. Technology companies can make use of IP, recurring revenues and strong product offerings to secure debt funding. Even if the company is pre-profit. Debt is cheaper to service in the long run, allowing you to maintain control over your technology and the company and maximise returns when you come to exit.
“No two tech companies will have the same growth journey, but there are shared milestones that will be reached by almost all companies.”
Achieving these milestones requires significant monetary and also human investment. Developing products, customer acquisition and retention, hiring strong management teams and scaling the business all requires growth funding as a technology business makes its way towards profitability.
On the equity side there are the initial Angel Investors, Seed rounds and Series A, B, C… etc rounds. Getting cash into the business while sacrificing shares.
On the lesser known debt side however many more options present themselves. Pre-profit technology companies on a strong growth trajectory can access growth funds by unlocking the value of their intellectual property and secure funding against recurring revenues, all without dilution.
This debt is often utilised for the following:
- Growth – acquire new customers, product roadmap, enter new regions etc
- Acquisition – buy a competitor, partner or technology
- Share buy back – buy out early investors before the valuation accelerates
- Cash out – take cash off the table to realise some value
- Bridge – if you are VC backed, bridge to the next round