Founders: DO NOT RAISE CAPITAL. yet.

Not all debt products are created equal.

An essential element of the success of early-stage company’s success is an entrepreneur’s ability to raise capital to build and grow the business.  In fact most founders focus on their business plan and coding or building their initial release, without putting any focus on the funding.  This is in line with our recent theme on “#Validation”; startup founders typically spend too much time building, and not enough time speaking with customers and investors.

When a founder sets out on the the long, exhausting, never ending road to financing their venture, they typically start with friends and family. At this stage, founders typically have not much more than an idea, maybe some code or a prototype, and the skeleton of a business plan that will almost certainly look completely different in the coming months (even weeks!). You approach friends and family and since they love and believe in you, they help with a bit of cash to get you through what startup founders will learn is the easiest stage – the planning stage.

Now they have a bit of capital to invest into building their “MVP” – Minimum Viable Product (for those not in the know, check out the Lean Startup Methodology developed by Eric Ries, a phenomenal and comprehensive set of guidelines for founders).  Great.  And if they have been listening to our Founder and CEO, Shane Smitas, they’d know that that’s not nearly enough – you need to be validating with your end users the entire time you’re building.

So, let’s say the MVP results in a handful of paying customers and things are staring to look up for the blossoming startup.  Founders now learn very quickly that they need runway for the next year at least while they build out, add more features/products, sales and marketing to get the word out, not to mention office space, legal fees, and the never ending mountain of costs associated with running a successful company.  So founders typically look to Angels – investors with a bit more appetite for risk willing to join your vision and invest in something a bit more risky.  Perhaps unlike the friends and family round, they’re going to want to take a sizable chunk of your equity.  These are now long term partners who want to get in on the ground level and maximize their return for investing in such a risky, new venture.

The capital from the Angel allows founders to continue on their journey of building the next unicorn (or hopefully, a sustainable, revenue generating venture).  But soon enough, the company needs even more capital.  See the recurring theme here?  Founders should always, always, always, be fundraising. But at this point, the company should be generating at least some revenues.

This is where Revtap comes in.

A founder has to make a choice.  They’ve got a little traction, enough to attract a Seed or Series A round with a bit of work, a polished pitch, and a lot of luck.  But the valuation they get today, just when they’ve started to get traction and actual paying customers, will be far worse then even 12 months from now when there’s a history of cash flow.  And the difference can be dramatic.  Fundraising at this point is no longer only about cash — it’s about control.

Often, startups may seek out runway financing to bridge between rounds.  Bridge financing like this can be seen that a startup is facing difficulties – implying the company is in financial trouble.  But it can also be strategic.  When a company has gained a little traction, has paying customers, and is now generating revenues, leveraging this into capital before raising a full round gives a company enough runway to continue to gain customers, ultimately making the business far more attractive to investors at future rounds.

But why stop here?   Cash flow is king.  Why bother raising a Seed or Series A, if you’ve got cash flow coming in that you can leverage and avoid giving away equity altogether?

Revenue sharing through Revtap isn’t designed to be a cheap alternative to venture capital – it just happens that way.  When you consider that the initial 10, 20, even 30% equity you saved replacing Seed or Series A with Revenue Sharing is now worth many multiples what it was back then, it’s pretty clear.  Not only are you keeping control over your company, the cost savings can be dramatic.

Founders, DON’T RAISE CAPITAL THROUGH EQUITY.  Yet.  Use Revtap to leverage your revenues into growth capital

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