Raising the right kind of money [Opinion]

I was at last weekend’s Mix N’ Mentor Beirut, and after sitting in on two fundraising mentorship sessions it became clear that there are several misconceptions around the fundraising process.

Venture capital is sometimes seen as the holy grail of money by entrepreneurs, but it’s not necessarily the right kind of money for your business.

There are two financing instruments you can use to obtain capital - debt or equity - and what you need can depend on your business model and the stage your company has reached.

 

Your business model is the process your business undertakes to generate revenue: how will you make money from providing X service or selling Y product?

Business models in tech can be subscription-based, where you provide access to a library of content in return for a monthly fee, or from one-off sales where you sell your app-development services for a fixed price. You could make a commission off sales between two independent parties - a marketplace - or you might simply be selling advertising space on your website or app.

In order to build your business to that point, you need to generate money to finance your operations and pay your employees. And if you are at the idea stage, you need capital to start your business.

But sometimes cash flow from operations is not enough for a business to really reach its potential.

The right kind of money

Choosing the right financing for your business depends on several factors, including how much money will you need to raise in order achieve your vision, what your current cash flow situation is, and how long will the funds you plan on raising last before you need to raise more capital.

As a general rule: if you are generating enough cash to sustain the business and have a little bit extra, but still need money to invest in growth, go for debt.

If you are a tech business with a business model that is not clear but have a vision to build a big company, and have identified investors who can add value and be patient while you build the business, go for equity.

Debt

Pros:

Cons:

Equity

As a general rule of thumb, raise enough money to last you 18 months and expect the process to take 6 months. Giving investors anywhere between 10 to 30 percent for each round of funding is normal, as is owning only 35 to 50 percent of your business by your 3rd round of financing.

Pros:

Cons:

Convertible loans

If not calculated properly and mapped out on a cap table you could face significant unforecasted dilution when convertible loans convert into equity.

Pros:

Cons:

Understand what options are available for you and take the time to ask people who have benefited from these various forms of financing to identify the right path for you.

Ultimately there’s no one answer, and you can raise a combination of debt and equity over the life of your company, depending on what stage your business is in.