When should you raise funds and what can the debt-to-equity ratio be? The experts answer

Running a startup is no easy task. There are several issues to address and questions to answer. One of those questions that founders often struggle with is: As a startup, when should you look to fundraise?

Even if that pertinent question is addressed, there remains the contentious issue of debt versus equity, or what the funding ratio should be.

At TechSparks 2022, the 13th edition of your history flagship summit of tech startups, experts came together to answer some of these questions. Blume Ventures Partner Ashish FafadiaManaging Partner of Alteria Capital Punit Shahand HSBC Director and Country Chief Technology Officer: Commercial Banking Dilip Gopinath took a deep dive to demystify some of the common funding fears.

Ashish said, “In terms of fundraising, the bottom line is: what is it being raised for, what is the value proposition, and where is it being built toward?”

According to Ashish, you should seek funding only when you’re in a position to tell a story about it, what a big problem you’re solving, and why you’re walking down that street.

Tech sparks 2022
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With equity financing, there is no loan to pay. The business does not have to make a monthly loan payment, which can be particularly important if it does not initially make a profit. This, in turn, gives one the freedom to funnel more money into the growing business.

On the other hand, debt financing occurs when a company raises money for working capital or capital expenditures by selling debt instruments to individual and/or institutional investors.

Speaking of the funding relationship, Puneet says, “If you’re a founder, you’ll be building the business over the next ten years and you’ll need to raise hypothetically $60-$70 million. Now, one can divide this amount into $30 million in equity and $10 million into $20 million in debt. That’s the impact from a dilution perspective.”

Discussing the pros and cons, Ashish explains: “The advantage of equity is that this type of source of capital is there to stay with you and you can use it during the formative years of your journey, building your product, building the initial team , and in the marketing and sales funnel. And there will never be an expectation of physically paying that amount. Either it will be a future investor who, in the next few years, will buy that equity and come out as an early investor, or, hopefully, the way right thing for the company is to go for an initial public offering.

“The downside of equity is that it brings with it dilution. The upside of debt is that you can build without the dilution aspect of the business, but then it brings with it some responsibility that there’s enough cash flow in the business,” adds Ashish. .

Explaining further, Dilip says, “One of the advantages of debt capital is that the bankers bring a lot of governance into the business operations. We don’t go into the board to see how to run the business or the startup, but what we do ensure is that the finance team is at the top of the game in terms of ensuring that working capital utilization is made, so banks can give you the flexibility of different instruments and it brings a kind of discipline into your operations. disadvantage is the bank debt. It is not scalable”.

Techsparks 2022 GIF