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With all due respect to the OP, I think debt is amazing and a great and sensible solution of financing a company - that VCs want to distract you from for their

With all due respect to the OP, I think debt is amazing and a great and sensible solution of financing a company - that VCs want to distract you from for their own benefit. If all factors point into the right direction, why would you give VCs a free ride with a steaming train instead of just going all in yourself and personally taking on a bank loan? (especially in the way more conservative and less trigger happy VC environment in Europe) No doubt it's hard (due to much heavier regulations around bank loans), but with the right KPIs it's really not much harder than raising a round. Sociomantic did it. We did it too - and by now financed our own Series B with revenue. Way too many people trying to build a startup instead of building a company...

coldtea 10y ago
>why would you give VCs a free ride with a steaming train instead of just going all in yourself and personally taking on a bank loan? Because most startups fail? And startups that VCs aren't interested in, even more so?
- rdlecler1 10y ago
  Average deal size is $15m which means that the company probably has some mix of equity and debt in their capital structure. Equity can be used to cushion variance in debt servicing payments. Ultimately if you're taking on debt you're expecting that your your ROI is exceeding your debt payment. While some companies may default, an equity position may not have saved them either. Net-net, smart use of debt could generate better returns for VC as an asset class as companies will suffer less dilution and it'll drive stronger selection for companies generating positive cash flows.
- ceejay 10y ago
  I think now is a perfect opportunity for the startup community to work toward changing this. In other words, I think dependence on VCs (or loans in general) for success builds an ecosystem filled with unicorns and everyone else. I think that's incredibly unsustainable and surprised not more people are trying to fix this. What I think the ecosystem of startups in general (not just tech startups) needs is a continuum where it's more or less obvious how to "plug into" an ecosystem and succeed. And as long as your company is producing a satisfactory product / service (to the customer) you're more than likely going to succeed. Will this transition happen within our lifetimes? Perhaps not, but I think it's an important thing that needs to be fixed for the future of civilization. Do I even know exactly what this other world will look like? Probably not, but I do believe it assumes there will be far fewer ultra wealthy and ultra poor, and a whole lot of middle class.
- andruby 10y ago
  > And startups that VCs aren't interested in, even more so? Do you have any reference or data to back this claim? VCs often aren't interested in startups that don't aim to be a billion dollar business. And those might actually have a better chance of succeeding.
  - codelitt 10y ago
    Exactly. DHH quite famously argues this point. https://m.signalvnoise.com/reconsider-41adf356857f#.9npvz09ah https://m.signalvnoise.com/reconsider-41adf356857f#.9npvz09a...
  - coldtea 10y ago
    Sure, and they are great, but those are not the startups the article talks about though.
jasode 10y ago
>, why would you give VCs a free ride with a steaming train instead of just going all in yourself and personally taking on a bank loan? You mean "personally" as in the young company has no material revenue -- and therefore for any "business loan" the founder applies for, the conservative banks will always demand collateral of personal assets including house, car, retirement savings, etc? (The young startup has no business assets such as airplanes, factories, datacenters, etc for the bank to seize in case of non-payment.) Well then, the "why" should be obvious: VCs can give orders-of-magnitude more money than personally-collateral-backed bank loans can provide. Also, the VCs (the good ones) can dive into their rolodex to help you hire hard-to-find executives. A bank loan officer doesn't have the same motivations. E.g. In 2005, Mark Zuckerberg got $12.5 million from VC Accel Partners. There is no bank that will give a 20-year-old college dropout with no revenue a $12.5 million loan. Yes, his parents were upper-middle class but I doubt Mark had $12 million in personal assets to secure as collateral for a bank loan. >, but with the right KPIs it's really not much harder than raising a round. I think it's very hard to concoct a scenario where a startup founder has virtually equal opportunity to secure $1 million bank loan or $1 million in VC investment -- and the only reason he chose the VC was that the founder didn't have the financial wisdom to choose the debt. I can't think of a case study where that suboptimal decision actually happened. In other words, the type of business (lifestyle/bootstrap/niche vs mainstream grow exponentially fast) or lifecycle stage (early no revenue vs mature with revenue) already predetermines a path of debt vs VC investment.
- endymi0n 10y ago
  Granted, especially for business models with low initial revenue / high lock-in / winner-takes-all properties and for young founders without large assets, you are completely right that there's often a lack of other options. That being said, other sources of funding than VC (debt, mezzanine capital, government grants, incentivized programs, early temporary monetization options or getting experienced execs as cofounders for real shares (not the usual .5 options)) instead of paying them hard cash with borrowed money later on are often totally overlooked by startups IMHO for their own detriment.
  - qwrusz 10y ago
e40 10y ago
If you are young and have no assets, you won't get a loan of much value. If you aren't young and have assets, ones that your family relies on, then you are risking the very foundation of your family--your home, car, savings, etc. There's a very good reason loans are used more than they are.
SeeDave 10y ago
>and by now financed our own Series B with revenue Out of curiosity... how does one finance their own Series B with revenue? Did you actually issue new stock? >Way too many people trying to build a startup instead of building a company... Very wise words.
gumby 10y ago
> by now financed our own Series B with revenue. Do you mean "didn't need to raise a second round because we are profitable/growing?" Way to go!!

coldtea 10y ago

>why would you give VCs a free ride with a steaming train instead of just going all in yourself and personally taking on a bank loan? Because most startups fail? And startups that VCs aren't interested in, even more so?

rdlecler1 10y ago
Average deal size is $15m which means that the company probably has some mix of equity and debt in their capital structure. Equity can be used to cushion variance in debt servicing payments. Ultimately if you're taking on debt you're expecting that your your ROI is exceeding your debt payment. While some companies may default, an equity position may not have saved them either. Net-net, smart use of debt could generate better returns for VC as an asset class as companies will suffer less dilution and it'll drive stronger selection for companies generating positive cash flows.
ceejay 10y ago
I think now is a perfect opportunity for the startup community to work toward changing this. In other words, I think dependence on VCs (or loans in general) for success builds an ecosystem filled with unicorns and everyone else. I think that's incredibly unsustainable and surprised not more people are trying to fix this. What I think the ecosystem of startups in general (not just tech startups) needs is a continuum where it's more or less obvious how to "plug into" an ecosystem and succeed. And as long as your company is producing a satisfactory product / service (to the customer) you're more than likely going to succeed. Will this transition happen within our lifetimes? Perhaps not, but I think it's an important thing that needs to be fixed for the future of civilization. Do I even know exactly what this other world will look like? Probably not, but I do believe it assumes there will be far fewer ultra wealthy and ultra poor, and a whole lot of middle class.
andruby 10y ago
> And startups that VCs aren't interested in, even more so? Do you have any reference or data to back this claim? VCs often aren't interested in startups that don't aim to be a billion dollar business. And those might actually have a better chance of succeeding.
- codelitt 10y ago
  Exactly. DHH quite famously argues this point. https://m.signalvnoise.com/reconsider-41adf356857f#.9npvz09ah https://m.signalvnoise.com/reconsider-41adf356857f#.9npvz09a...
- coldtea 10y ago
  Sure, and they are great, but those are not the startups the article talks about though.

jasode 10y ago

>, why would you give VCs a free ride with a steaming train instead of just going all in yourself and personally taking on a bank loan? You mean "personally" as in the young company has no material revenue -- and therefore for any "business loan" the founder applies for, the conservative banks will always demand collateral of personal assets including house, car, retirement savings, etc? (The young startup has no business assets such as airplanes, factories, datacenters, etc for the bank to seize in case of non-payment.) Well then, the "why" should be obvious: VCs can give orders-of-magnitude more money than personally-collateral-backed bank loans can provide. Also, the VCs (the good ones) can dive into their rolodex to help you hire hard-to-find executives. A bank loan officer doesn't have the same motivations. E.g. In 2005, Mark Zuckerberg got $12.5 million from VC Accel Partners. There is no bank that will give a 20-year-old college dropout with no revenue a $12.5 million loan. Yes, his parents were upper-middle class but I doubt Mark had $12 million in personal assets to secure as collateral for a bank loan. >, but with the right KPIs it's really not much harder than raising a round. I think it's very hard to concoct a scenario where a startup founder has virtually equal opportunity to secure $1 million bank loan or $1 million in VC investment -- and the only reason he chose the VC was that the founder didn't have the financial wisdom to choose the debt. I can't think of a case study where that suboptimal decision actually happened. In other words, the type of business (lifestyle/bootstrap/niche vs mainstream grow exponentially fast) or lifecycle stage (early no revenue vs mature with revenue) already predetermines a path of debt vs VC investment.

endymi0n 10y ago
Granted, especially for business models with low initial revenue / high lock-in / winner-takes-all properties and for young founders without large assets, you are completely right that there's often a lack of other options. That being said, other sources of funding than VC (debt, mezzanine capital, government grants, incentivized programs, early temporary monetization options or getting experienced execs as cofounders for real shares (not the usual .5 options)) instead of paying them hard cash with borrowed money later on are often totally overlooked by startups IMHO for their own detriment.
- qwrusz 10y ago

e40 10y ago

If you are young and have no assets, you won't get a loan of much value. If you aren't young and have assets, ones that your family relies on, then you are risking the very foundation of your family--your home, car, savings, etc. There's a very good reason loans are used more than they are.

SeeDave 10y ago

>and by now financed our own Series B with revenue Out of curiosity... how does one finance their own Series B with revenue? Did you actually issue new stock? >Way too many people trying to build a startup instead of building a company... Very wise words.

gumby 10y ago

> by now financed our own Series B with revenue. Do you mean "didn't need to raise a second round because we are profitable/growing?" Way to go!!