Debt vs. Equity - Which one should startups use?

By Yohan Albo

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Any young company looking to raise money must first decide on a type of financing: debt or equity. Debt financing refers to when a business borrows money that they then need to pay back with interest. Equity financing, on the other hand, is when investors inject capital or other assets into a business in exchange for a certain percentage of ownership. Startups should be aware of the advantages and potential downsides of each form of financing.

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Debt financing allows new companies to retain large stakes of ownership and autonomy.

 If successful in the long run (i.e. the initial loan is paid off), this guarantees that the totality of profits is returned to the business, rather than investors. The complications, however, can be overwhelming. The most obvious restraint of debt-financing is that the principal and interest on the debt must be paid back, irrespective of how well the business is doing. Like a black hole, debt repayments can begin sucking capital away from productive uses, thereby making it even harder for a business to grow and pay back its debt. This seemingly inescapable cycle can lead to compounding losses or worse, outright bankruptcy. This is bad news for startups, which are by nature high risk; in fact, most never make it past the first few years of business.

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For that reason, many startups (the vast majority to be honest when it comes to the Israeli market) opt for equity-financing. Angel investors aim to provide early-stage companies with vital capital, while simultaneously lowering risk. Institutional investors, such as venture capital firms, also provide such services but generally in a more selective manner. This form of financing is especially important for businesses that have yet to reach the stage of profitability, as they can offload risk without being crippled by recurring debt repayments. Equity financing also tends to provide larger amounts of cash, creating more room for rapid growth and scalability. Despite these advantages, equity financing carries its own pitfalls. Most obviously, an entrepreneur loses a percentage of their business and subsequently, the power to make certain decisions. Equity fundraising is also time-intensive, both in terms of initially finding investment and later, reporting to investors on a consistent basis.

So, which is the best funding for your startup? Debt or Equity? The answer is it depends. There are numerous factors that should be taken into account such as how comfortable you are with risk, your company’s current level of profitability and how you want to spend your time. What’s most important is reflecting on the priorities you hold closest and with rigor, matching those priorities with the form of financing that will provide the most value to your business.

At DataToCapital, we believe in the transformative power of finding the right investor–or in most cases, investors—for our clients. Yet, we also understand the challenges of early-stage fundraising. The process is complex, timely and competitive. In today’s day and age, connections are everything. That’s why we don’t just help clients develop effective fundraising strategies; we also provide access to an established network of private investors, making fundraising simpler and allowing our clients to focus on the work that really matters.

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DataToCapital is a boutique management consulting firm that supports global tier-1 firms and start-up companies operating in Israel in their route to excellence and market dominance. Our core services, designed for CEOs, Executives (VP-level and above) and Entrepreneurs, can be divided into three areas: Market Intelligence, Corporate and Product Strategy, and Execution Support on top-down strategic initiatives.

The quality of the work we deliver in the three areas mentioned above is equivalent to what your company may already get from the top-3 consulting firms that operate in the Israeli market, BUT here’s the twist and why our tier-1 clients think we are superior.

We don’t only provide smart recommendations, we work closely with the management team and can also support driving the execution of their strategic initiatives behind the scenes or as a proxy.

We are at the strategic intersection of Business and Technology. Thanks to our rich background, we know how to connect the dots between the two worlds, and how to be very creative when it comes to disrupting business models or addressing sub-optimized processes with the help of advanced technological solutions (Machine Learning, Big Data, Data Visualization, Enterprise Software Solutions, and many other tools present in our toolbox).

This is a built-in feature. No account manager, no complex communication chain, etc... This is why our firm aims to dominate the management consulting market in Israel with no more than eight talents (...on steroids).

Our long-term vision is to become the trusted advisor to the most influential businesses and institutions operating in Israel, and help them become global leaders in their markets.

DataToCapital Consulting Is An Active Member Of The Israel Advanced Technology Industries (IATI) Association And Of The Israel's Directors Union

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