December 10, 2020

Debt Capital: What It Is & Its Effect on Future Venture Capital

Debt Capital: “If I take on debt now, will it have a negative impact on my ability to raise venture capital later?”

This is a common and important question we get from SaaS Founders who are considering adding debt to their capital structure.

The short answer is: NO. Taking on debt now will not negatively impact your ability to raise equity in the future, SO LONG AS you don’t take on an outsized amount of debt that will require repayment using an outsized % of the future equity financing. Equity investors understandably loathe that and may walk away because of it. They want their money primarily going to value creation, not toward paying off liabilities to “clean up” your balance sheet.

Over 50% of the companies we’ve funded at BigFoot Capital since 2017 have either raised equity or sold their business subsequent to our lending them money. Our being in the picture has presented no friction to these outcomes and, I would confidently argue, has actually helped make them viable while helping Founders reap more value from them.

The concept of debt often carries a negative connotation — think personal debt like student loans or credit card debt that’s not being paid down. However, when we’re talking about business debt, it’s time to flip the script.

What Is Debt Capital? 

Businesses have reasonably used debt to fund growth for thousands of years. This is not a new phenomenon in and of itself. It’s the application to and availability for SaaS companies at a relatively early stage is, which is wonderful for Founders. Turns out utilizing non-dilutive debt capital to fund growth can make a lot of sense (and save a lot of cap table).

Any reasonable equity investor should be able to wrap his/her head around your having used debt to fund your business in lieu of using equity capital to do so, especially if they weren’t there writing you checks at the time! That said, some equity investors simply have an aversion to debt that puts a bad taste in their mouth. They may also view it as competitive or transactional in nature. After all, equity investors generally want as much ownership as they can acquire and many like to be the “voice in the room” adding value beyond money. We’re all individuals with our own experiences and preferences at the end of the day, so be it…

At Bigfoot, we are extremely sensitive to over-levering companies (putting too much debt on them). Why? Shouldn’t we try to put out as much money as possible? Shouldn’t you as a Founder want as much money as possible? Might we benefit by putting a company in a precarious position where it can’t pay us back? No, no, and no.

We work together to determine the appropriate amount of debt to take on for the stage of your business. This can grow over time, but having it be outsized out of the gates is not the way to do it. It will actually constrain your ability to grow and potentially foul up future capital formations (both equity and debt), both of which compromise the overall health of your company, not a good look. As a lender to early-stage companies, we are sensitive to the fact that your growth and supporting capital plans are fluid. By necessity, they evolve and mature alongside your business. New options open up. Costs come down. You get more comfortably in the driver’s seat.

How We Support Companies With Debt Capital 

Many companies come to us with existing debt in the form of several small loans. We completely understand why — you gotta do what you gotta do, for a period of time. Then you have to do something new and grow beyond what you were doing. So, we’ll often consolidate those smaller amounts which carry higher costs and less flexibility into a larger, more growth-oriented loan that helps fund your next wave of growth. 

Then, guess what, this generally happens again a couple/few years down the road as more growth has been achieved. An equity round happens, an M&A event occurs, a bank comes in and lends money. Any of these is the next natural step we work to help our companies achieve. At that time, we’re happy to stay on the ride or hop off; it’s really about what’s holistically best for the business and its stakeholders, the way it should always be!