Why Saas Debt Is Cheaper Than Venture Funding To Grow Your Business

Three years ago at a tech conference, I heard a SaaS founder on a panel describe how he raised debt to grow their business, not funding with equity.

The audience almost gasped when he described how they are happily paying back the loan with interest. It wasn’t free money.

What? You didn’t raise “free” VC investment by selling a piece of your company that you “don’t have to pay back?”

This founder had a serious bootstrapped business in a growing market. Over $5M in annual recurring revenues with solid growth, great retention, and some profit.

They didn’t have to raise money, but they wanted to grow faster. And they could have raised VC capital at great valuations.

Here’s what he said back then, effectively:

“Venture debt has a higher interest rate and you have to pay it back. But that’s still WAY CHEAPER than selling 20% of your company stock to investors.”

He explained the simple math to the audience that showed if he grows his business 5X, venture debt is 10X cheaper than equity funding at the exit, for their business and their exit plan.

The crowd started taking notes when he said that.

I just learned this week that he sold his business for a big exit. He and his team earned $20M to $30M more than if he had raised the same amount with equity.

That is a LOT more than the interest he paid on the debt. That was his point.

I’m not saying that venture debt is a great fit for all SaaS companies, that VC funding is bad, or that bootstrapped founders should even raise.

I am saying that venture debt is one of the cheapest ways for up-and-running SaaS companies with mature metrics to accelerate faster with outside funding.

It’s not for messy startups or SaaS companies generally under $2M-$3M in ARR. Debt only works when you are really sure you can generate the profits to pay back the loan and end up much further along in your growth.

Venture debt was unknown and uncommon 5 or 10 years ago in SaaS, but it has been around for a long time.

Dozens of serious SaaS founders I know are using venture debt to efficiently grow faster or “skip a round” in a well-managed way.

These days I talk to just as many venture debt providers as I do with early-stage VCs. There are many flavors of debt for SaaS companies too.

This week on the Practical Founders Podcast, Echosec founder Karl Swannie talked about how they raised debt two times after they were up and running. It paid off for Karl and his team too.

There are many paths and possibilities to raise practical outside funding for the right reasons.

#practicalfounders

Get the weekly Practical Founders email and podcast update.

Share Practical Founders

FREE 60-PAGE EBOOK

Win the Startup Game Without VC Funding

Learn how all 75 founders on the Practical Founders Podcast created an average founder equity value of $50 million.