When people think of startups, they also think of venture capitalists. Venture capital refers to investments in early-stage companies. Typically, venture capital providers take an ownership stake in the company in exchange for support during the early stages. Venture capital usually takes the form of money, but sometimes it can be in the form of expert advice. Venture capitalists know their investments are risky, and they look for long-term, not short-term, gain.
While venture capital is important for many new businesses, it’s not the only viable funding source for a startup. This is particularly true during the later stages of a business’s development. Recently, more and more companies are looking to debt financing to raise funds. Debt financing, also known as a debt raise, is the opposite of selling equity in a company. Instead, the business sells instruments like notes or bonds that offer a fixed rate of return.
Some entrepreneurs are attracted to debt financing because it allows them to retain more control over their companies. Instead of selling an ownership share, instruments like bonds, bills, and notes make it possible to get funding while still directing the future of the company. In recent months, education companies like Udacity and Skillsoft have used debt financing to raise money. So have household names like Airbnb.
Part of this shift is due to economic changes caused by COVID-19. Although venture capitalists are hardly risk-averse, even they are starting to pull back from some investments. This is particularly true for industries like travel. Companies in the hospitality industry know that a recovery is coming, but it will take time. Selling bonds with a fixed interest rate and a specific date may be more attractive than offering stock to impatient investors.
It’s also easy to forget that venture capital is a fairly new approach to raising funds. Venture capital got its start in a big way after World War II. While most new companies use it as their capital base today, that wasn’t always the case. In some ways, debt raises are a return to a more time-honored way of raising funds. That said, only about two percent of early-stage companies today use debt raises as their capital base.