As a startup needing growth capital, it's important to know that all capital is not created equal. The kind of capital you're raising often dictates what you use it for.
During my 10+ years in venture capital and angel investing (at Canaan Partners from 2005, and as a founding member of the Indian Angel Network), I've spoken to scores of founders looking to raise equity to fund their businesses. Especially in the B2B space, with long payment cycles, this would often be to help manage working capital as the company scales.
But it's important to realize - venture equity is often the most expensive source of capital there is. With the kinds of IRRs that venture funds target, your investments of equity capital need to generate very high returns, and deploying equity in working capital creates a drag on those returns. Further, very few startups actually land up raising venture capital to scale their businesses.
Debt, on the other hand, is far more suited to low-risk investment areas like working capital.
Traditionally, it is not an easy task to raise debts for startups. As amateur companies without extensive track records, with asset-light businesses that do not allow for collateralized loans, it’s difficult to convince traditional banks / NBFCs to lend to you.
But that’s changing now.
Thankfully, there's now an option - pure-play working capital financing.
One such example is Indifi, an SMB lending platform, that is offering working capital financing to B2B startups.
So how do we get around the low vintage and time to profitability?
We’ve structured our solution to finance you against your receivables from regular / reputed corporate buyers. This is how we mitigate the risks that traditional financiers see - by taking into account your buyers' profiles, and the strength of your relationships with them.
Whether you’re a bootstrapped startup looking to grow steadily, or a seed / Series A stage startup with strong growth potential - if you have strong B2B customer relationships, you can now access debt financing with ease.
How does it work?
Much simpler than raising equity capital! All you have to do is share your history of business with regular reputed B2B customers you are interested to avail working capital against. We use that to assign a credit line, which can then be drawn in the name of future invoices to those customers. We advance you a large part of money due on those invoices, and then recover the money when the customer pays you. Voila!
So save your equity for the right investments – to power 10x growth initiatives. And use debt instead, for incremental opportunities and working capital.
Article contributed by:
Alok Mittal, CEO, Indifi