So I am glad that “non-dilutive” financing vendors exist, and they do an important service when used properly:
They can help you invest a little more in growth, if you are growing at a good clip and aren’t burning that much or anything.
That’s when they are useful.
These products are marketed too aggressively, however:
- First, they may be a good deal in some cases, but they aren’t cheap. With fees and costs, you’re often paying 10%-15% effective interest or so, including all costs.
- And unlike equity, you do have to pay them back. Often over 36 months. That creeps up on you fast.
- If you don’t control the burn, you may end up having to raise equity funding earlier, potentially at a lower price. That can lead to more dilution. Not less or “none”.
- Whatever these products are, they aren’t free and they aren’t a replacement for VC investment. So the name is a bit of a misnomer. Instead, most really fund high NRR start-ups ahead of cash receipts and renewals.
Now these products have their place. When I was at $6m ARR and basically cash-flow neutral, growing 100%, I raised $2.5m in debt. It was well raised, as I used it to expand our sales and engineering teams. It let my VP of Sales and CTO each make 3-4 more hires earlier. And by making those hires earlier we could close more deals.
So it was accretive. No doubt.
If that’s you, think about doing it. I’m all for it.
Now if you are growing 20% at $2m ARR, and aren’t cash-flow positive, that “non-dilutive” debt may seem attractive. But you aren’t going to have an easy time repaying it. The interest and costs will seem expensive a few months in, and since you have to repay it all in 36 months anyway, it won’t even buy you much time either.
Just be thoughtful. Debt is best used in start-ups when you don’t really need it, when you can do just fine without it. But a little bit of extra cash would help you keep stepping on the gas.
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