Go beyond debt and equity
Most investors and startups think the only way to get funded is either through debt or equity. But that is not true.
Traditional funds and lenders dominate the funding space and they have their own restrictions and limitations which force them to use either straight equity or debt. And because they fund the bulk of transactions, most other investors have to or choose to follow their lead.
But it does not have to be this way.
Right structure, right company.
Each investor and company has its own expectations and requirements. Finding the right match with the right structure makes life easier and more fun for both.
There is a whole world between debt and equity, but we either go for equity or loans. For the investor, equity means an uncertain exit with an upside. For the founder, it's the most expensive form of financing. Debt provides no upside for the investor's risk and creates undue burden for the startup.
Thinking the investment has to be straight equity or debt, is simply an opportunity missed.
Instead, we need to create tailored structures.
One way to start is to thinking creatively and blend the instruments.
Mezzanine financing is one such option. A mix of debt and equity, which provides flexible loan repayment (can be revenue based, for example) while still leaving some upside for the investor. Partial loan repayments mean quicker de-risking for the investor while leaving founders with more equity.
Here are a few tips I learned along the way that helped me initiate constructive structures:
Tip #1: Know your goals. If you know your return targets and time horizon, you can break them down to components and create custom structures that match your risk/return appetite.
Tip #2: Know your investee. Understanding the specifics of each business and entrepreneur leads to compatible structures. Cash repayments on a loan may not work for an R&D company, but payments in kind would, and create the right incentives.
Tip #3: Know your options. Learn the available financial options to create the right blend for yourself. One great place to start is here: Adventure Finance by @aunnie
When we go for just equity or debt, we miss out a lot of potential investors, investments and great companies that can make the world a better place.
There is always a middle ground, one that is suitable for all involved.