Why to raise non-dilutive capital with plenty of runway

Managing cash flow is one of the biggest challenges founders face, all the way from start-up through to maturity. This is particularly the case for growth-stage SaaS and other tech companies, as they consistently prioritise and invest in high-cost growth and development activities. 

To address this, founders traditionally raise funds from venture capital (VC) investors each time the business is in need. Despite solving the problem in the interim, this comes at the cost of precious equity and control in the company, and therefore must be done at the right time and in moderation to avoid giving away too much.

But VC is not the only solution, and it’s important for founders to diversify their fundraising approach to reduce their overall cost of capital and reliance on a single means.

One type of alternative is non-dilutive capital – which might be in the form of venture debt, recurring revenue finance or revenue-based finance.

With these solutions being relatively new for Aussie founders, we’re often asked one question:

Is it best to take on non-dilutive capital with a little or a lot of runway?

Of course, this depends on each founder and business’ respective situation and needs, but many choose to take it on while having plenty of runway.

This may seem counterintuitive at first, begging the question; What’s the point in raising if you have plenty of runway?

Well, having non-dilutive capital allows precious equity capital to be reserved for the right occasion. In addition, companies that are burning cash to promote growth will likely need to raise again and raising with plenty of runway can help founders access the most funding on the best terms. 

So, how does this work?

Reserving equity capital for the right occasion

Being proactive in raising non-dilutive capital can ensure precious equity capital is spent on the right initiatives or preserved for longer.

Equity capital is extremely hard to raise and expensive due to the expected high risk for investors. Therefore, saving equity capital for bigger bets and more uncertain times – like new product development, territory expansion or dire straits – helps ensure giving up the equity was worth it.

But if equity is the only kind of capital a company has, it will inevitably be spent on relatively standard or predictable initiatives too – like working capital or sales and marketing.

One way to avoid this is by funding those initiatives with new capital the business generates (i.e. free cash flow), but this is very hard to achieve while growing. 

The much easier alternative is to source non-dilutive capital in addition to equity capital.

See our previous blog post for more on key use cases of non-dilutive capital.

Get better terms

Non-dilutive capital providers look at the strength of the start-up to determine how much they’re willing to fund and at what cost. And one of those key strength indicators is runway.

As a result, start-ups approaching little runway are unlikely to get the maximum amount of funding from the provider and are more likely to pay a higher price for the funds they take on.

All else equal, companies with more runway can access the most funding at the best price. This difference could be as significant as many times the funding at half the cost.

Companies with more runway also have less of a time pressure to find capital, so can be patient. That time can allow them to find the funding partner that is best suited to their needs or can offer the best terms.

It's easy when using a tech-based provider

Okay, so understanding why raising early can be beneficial is one thing, but it doesn’t address the torment of pitching yet again (particularly if it’s  after finally wrapping up an exhausting fundraise), let alone the need for a founder or CFO to get back to focusing on the business’ core activities.

Well, unlike traditional venture debt providers, who require arduous pitches and lengthy due diligence, most tech-driven providers make it easy.

Kashcade is one of those providers. As a VC-backed start-up itself, the team understands the pain of traditional fundraising and has set out to solve it. It has streamlined the application process into only a brief call and a simple connection to its software.

Altogether, this process takes about 45 minutes, without requiring founders to create a pitch deck or convince an investment committee of their path to 100x. Instead, Kashcade lets the data do the pitching, minimising touch points and the wastage of founders’ time. 

If you’re a founder, CEO or CFO who sees the potential benefit and would like to further explore the concept of non-dilutive capital for your business, be proactive and reach out – our team will be glad to help.

Disclaimer

This article is for informational purposes only, is general in nature and does not consider your specific situation. It is not, and should not be relied upon for, financial, tax, legal or investment advice.