For raising capital, tech companies usually seek two options: finding an equity partner or choosing Growth Capital (or both). Growth financing can be a wisechoice for several reasons. An equity partner means giving someone a stake in your company. Someone who will inevitably get involved with its operations.
What visionary entrepreneur wants that?
Debt financing helps CEOs, founders, and business owners maintain ownership and control over their enterprise. Once the business gets the cash it needs—for capital expenditures, or its working capital—it’s simply a numbers game.
Some tend to think that current day leading brands and companies reached their profitability relying solely on equity rounds. That is far from the truth. The list of companies borrowing money in order to grow their businesses is endless. Here are a few familiar brands that relied on Growth Capital before they were household names.
“Raising debt is a sign that we’re entering a more mature phase,” Facebook’s CFO said, back in 2008. And it sure did raise some debt then, borrowing and data centers. The deal freed Facebook from having to raise more venture funding. And it’s a safe bet that Facebook’s CEO “liked” that, And felt meta-riffic.
Borrowing was such an essential ingredient for Netflix that, at one point, detractors referred to the company as “Debtflix”. The streaming giant borrowed over $16 billion in less than a decade as it built out its content library, using the influx of cash to pay licensing fees and production costs, as well as business expenses like payroll. In 2021, Netflix finally claimed its borrowing days were over, saying it no longer needed “external financing”.
Sometimes debt financing takes a nepotistic form. When GoPro founder Nick Woodman—an extreme athlete who wanted to capture film of he and his friends surfing—needed to raise capital, he turned to his parents, who gave him a $230,000 loan. It should be noted that he only turned to that option after selling shell and bead belts out of his VW van. The loan paid off, because only 12 years later, GoPro went public, selling nearly 18 million shares, raising the company’s value to $2.95 billion. Thanks Mom and Dad. Hope you got paid back – with interest.
By doing makeup tutorials on YouTube, Ipsy founder Michelle Phan developed a following. Then, after partnering with cosmetic brands, she accepted $500,000 in debt funding from various entities to get started. Only after Ipsy showed $150 million in revenue a few years later did she accept $100 million in venture capital. And promptly started buying up the competition.
As opposed to equity financing, debt financing is a solid option for the more established businesses and late stage start-ups with proven revenue streams, giving them the certainty they can execute their business strategy, without giving away their equity and decision making power.