The most expensive money you’ll ever raise will be the first round of equity financing. The reason is simple: the valuation of your business will be at its lowest. To illustrate my point I’ll use an example. John and his co-founder Ryan have built a SaaS business using personal savings. They shipped the initial release of their product by bootstrapping and have revenue to show for their efforts. The business shows promise, and the founders are excited about its potential. To further the effort, John and Ryan have been offered $150k by some local angel investors for equity in the business at a $2.0M pre-money valuation. Given the stage of the business, the valuation offered is not necessarily unfair. However, it means John and Ryan would be selling 7% of the business.
What if John and Ryan had the ability to delay selling part of the business? How much impact could it make?
Let’s continue, John and Ryan chose to decline the angels’ offer. Instead, they leverage credit card debt to further finance product development and customer acquisition costs. This results in additional traction. A year later they are offered an investment by a seed fund at a $7.5M pre-money valuation. Using the same investment amount of $150k to compare, instead of giving up 7% they are now only giving up 2% of the business. The difference of 5% in the whole scheme of things is material. Multiply that by your anticipated exit to understand, e.g. $20M times 5% is $1.0M saved!
This example illustrates the power of bootstrapping and the importance of leveraging other funding resources before selling equity in your business. However, personal credit card debt is not an optimal financing solution. Our Revenue-Based Financing offering is built for this specific funding need. Please contact us to learn more about how you can minimize or avoid equity dilution in your business.