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Ask HN: why don't startups/high growth companies raise debt rather than equity?
For the earliest stage companies, it's pretty obvious why they don't: they can't. But it seems like a lot of companies with great traction (~$1 MM in revenue), recurring revenue (subscription to content, products or software) and need are out there raising VC money in what amounts to equity (I'm counting convertible debt here, too). Why don't they try to use forward receivables to raise debt either between or in place of an equity round, which even at a high interest rate, is cheaper than equity?
- vasilipupkin 13y agobecause no investor wants to take an equity like risk for a limited upside return which debt is. If the company is still early, but doing well, you want the full upside.
- awaxman11 13y agoThere are definitely investors that like venture debt risk/reward like the following firms: http://www.goldhillcapital.com/ http://www.goldhillcapital.com/ http://www.westerntech.com/ http://www.westerntech.com/ http://www.orix.com/ http://www.orix.com/ There are also some commercial banks with venture debt arms like SVB, Comerica, and Square 1
- charlesbonello 13y agoBoth answers are correct, and make sense. I guess my question is fundamentally: is this a problem of supply (i.e. - not a lot of appetite to fund debt at these levels) or one of demand (entrepreneurs just prefer equity).
- danvoell 13y agosupply. Banks theoretically would provide debt to a company with 1mm in revenue, as long as they show the ability to cover the debt payments. But those companies typically can raise more money based on equity than debt.
- charlesbonello 13y agoSo the concern is that a debt financing would be smaller than a potential equity financing by some order of magnitude, as it's constrained by trailing cash flow rather than future opportunities?
- deleted 13y ago[deleted]