Financing options: ways to increase capital & grow your venture

New ventures require financing to grow. Each type of financing has its own (dis)advantages. Let's look at common financing options and the considerations one must make in deciding if said option is the right one for the venture.

Financing option #1: equity capital

Perhaps the most common form of financing, and certainly an option that many ventures use, equity capital is the selling of shares of your venture to investors in return for needed capital. There are a few key considerations of which to be mindful when offering equity.

Equity dilution can erode your control of your venture

Founders can collect a lot of capital by selling equity, but there is a cost: losing control of your venture. All equity has to add to 100% and if you continue to sell equity, round after financing round, you may lose your majority control. Even if you have plurality control, investors can team together to overtake your control. If you're not cognizant of the equity you can/cannot afford to sell, you'll lose control of your business and defeat the core purpose of being a founder. See "Offsetting equity dilution" to learn how that can happen.

Capital raised depends on valuation

The price at which you sell equity will depend on the valuation of your company. Theoretically and optimally, after each round of equity financing, the value of your venture will increase because you used the capital to improve the free cash flow of your business. If, however, the capital you raised in Series A did not increase free cash flow (e.g., you paid off debt or other expenses), the amount you raise in Series B will be less. In order to raise the same amount, you'll need to sell more equity at a lower price and quickly lose control of your business.

No marketplace for equity holders to sell their shares

Most founders offer shares of their company, and depending on the number of outstanding shares (shares not held by the venture itself), each share will represent a percentage of equity (ownership). What happens if an investor wants to liquidate his/her shares in your company? Since you're company is a new venture, there isn't an established and regulated marketplace in which one can *unload* his/her shares. Without a marketplace, the investor can either a) sell shares to you, b) sell shares back to the venture, or c) sell shares to another investor. Selling shares to you means you'd have to invest more of your personal wealth into the venture - something a founder cannot do given that s/he has already invested all s/he can to start the business. Seeling back to the venture would be an option that decreases cash while not increasing free cash flow (therefore, not increasing valuation of the company to the detriment of your remaining shareholders). And selling to another investor puts you at risk of losing control of your venture.

The big advantage is that it's "free" money: you don't have to pay it back or carry an obligation for receiving it. The downside is that it's usually a one-time event and the amount you can earn is limited. You can't have serial rounds of seed funding and while the money is free, it's also limited.

Financing option #4: sell (non-inventory) assets and/or reduce expenses

Ventures need to be prudent in the assets they buy and hold. One presumes that your venture has assets that it needs for the crucial operations of the business. If you're carrying assets that aren't useful in the near-term, you may consider a) selling or b) leasing those assets. Too often, founders sell assets that they will eventually need, only to have to repurchase them at a future date at a higher price. Instead, it may be worthwhile to consider leasing those assets to another business (hopefully not a competitor). Leasing assets means you retain control of the asset for a future need while generating revenue to fund your growth. 

Such revenue wouldn't be considered operating revenue because the manner in which you generated it is not at the core of your business.  Nevertheless, a secondary stream of revenue through asset leasing means your venture is becoming more self-sufficient and less reliant on equity or debt. Lastly, keep in mind that your asset will depreciate at a steady pace and by the time you're ready to use it in your core operations, it may not have the value or capability to perform the task you were hoping it would.

Lean. Lean. Lean. That mantra is core to ventures. Lean operations means:

1. no rework: get production right the first time

2. no flaws: resulting in returns, warranty claims, requests for complimentary services (comps)

3. no waste: use everything you have and recycle when you can

4. no excess: only produce what the marketplace demands (no excess inventory); only offer services (or service time) what the marketplace demands (no excess capacity)

Lean operations help you reduce expenses: decreased labor costs, lower operating expenses, less costly holding costs, lower working capital requirements. While revenue depends on many factors, costs primarily depend on one: the decisions you make as the founder.

Financing option #5: generate revenue

The best and ultimate option that all ventures strive to achieve: + revenue. Quickly establishing your venture to sell products and/or services is a great and self-sustaining way of financing current and future operations. Healthcare ventures, unfortunately, have a long runway before generating revenue. Credentialing with insurers and CMS, gaining approval from the FDA or other regulatory agencies, and then climbing the hill of healthcare provider inertia all contribute to delayed revenue generation. 

Revenue does not necessarily mean π. For that to happen, you'll need to price your goods/services correctly and competitively. See "Pricing your core offer" to learn how to do that.

Please let us know what financing options you've used and how you leveraged its advantages.