Debt vs Equity Financing: Lessons from Lighter Capital
Last week our CEO Mike had the chance to sit down for a webinar with Allen Johnson and Zach Hoene of Lighter Capital to discuss the ins and outs of debt vs equity financing (In case you missed it, you can find the recording here).
For those who don’t know, Lighter Capital is a fintech company that has created a new fundraising path for early-stage tech companies; revenue-based financing.
At Visible, we’ve had the opportunity to raise both equity and debt financing. In the Lighter Capital webinar Mike, Allen, and Zach breakdown the major differences between debt vs equity financing and how Mike managed to raise capital from Lighter Capital in just 15 days. You can check out our key takeaways below:
Debt vs Equity Financing
Securing Equity Financing
To kick off the webinar, Mike discussed experiences from Visible’s own fundraising efforts and what we’ve seen from our partners and countless companies using Visible for investor relations.
The biggest takeaway from raising equity financing? It is very much a process and can be very time consuming. Raising equity financing is essentially a full time job for the CEO or founding team. It is not something that can be done lightly and viewed as a “side project”. You need to build relationships and a pipeline of investors, show momentum, generate inbound interests, etc.
Basic Info and Docs You’ll Need While Raising Venture Capital:
- Legal Docs, Cap Table, etc.
- “Lines, not dots” – Trends over time. A regular cadence and rapport leading up to the investment. Investors won’t make an investment in a single point of time.
- Customer Acquisition Model
- Total Addressable Market and Sensitivity analysis
- Hiring plans and insane growth (see below)
Equity financing allows pre-revenue companies with a strong vision and adjustable market an opportunity to secure capital and pursue their vision. Investors are expecting a return and are often in pursuit of an “extreme upside”. As you can see below, Christoph Janz of Point Nine Capital breaks down what it takes to raise a Series A in SaaS below:
Securing Debt Financing
For those who aren’t growing at 300% but rather 150% or 200% a good option would be to look into debt financing. While there are countless types of debt financing, Lighter Capital focuses on “revenue-based financing”. There are several factors that Lighter Capital looks into when evaluating a potential investment but as Allen Johnson of Lighter Capital puts it, “At the end of the day they’re assessing the risk to get repaid”.
If the investment is unclear or deemed too risky chances are you are going to get a “no”. So how do you increase your chances of debt financing and close the round as quick as possible?
- Complete financial statements and documents. Poor or incomplete financial statements can put doubt in the mind of a debt-provider. Most debt-providers will look as far back as 2-3 years. Lighter Capital will occasionally make investments with ~6 months of solid financials.
- Understand your business. Have a deep understanding of where your customers, how you’re acquiring them, and why they are churning.
- Revenue Growth. You don’t have to be a profitable company to receive funding from Lighter Capital but should have a clear plan and pathway to profitability.
- Downside Scenarios. As mentioned above, debt-providers are focused on repayment as opposed to extreme upside. Make sure you lay out downside scenarios to show you can navigate down periods.
- High Gross Margins. Going hand in hand with “downside scenarios” show debt-providers you have high gross margins and can limit the downside as much as possible.
- Story matches the numbers. If you’re telling a great narrative and the data/financials are not matching up with the story chances are that will cause doubt in the mind of the providers.
- Plan for New Capital. Show you have a plan in place for how you will allocate your new capital. Allen of Lighter Capital has seen a clear connection between a company coming to them with a solid plan and their future growth.
How We Did It
A few months back, our CEO Mike turned to Lighter Capital for a finance round. It generally takes 4-6 weeks to close capital from Lighter Capital and Mike managed to take care of it in 15 days. How?
Investors are willing to move as fast as you are. Once we took the initial discovery call we had the financials, customer acquisition models, and churn reports in full detail. Using our own product, we were able to easily share our customer, acquisition, and churn data immediately. Thanks to our accounting partners we also had our key financials at our fingertips and we’re able to share clean and complete financials from the get go.
Both debt financing and equity financing are solid options depending on your stage, metrics, and financials. The biggest takeaway from both Mike and Allen when evaluating debt vs equity financing? Founders need to have a deep understanding of their business.