Why Capital Diversification Matters
Not All Capital Sources are Created Equal
As banks tighten risk and growth equity takes a back seat, there will likely be a continued liquidity crunch for startups. Not to mention, the demise of SVB and FRB introduced a new level of uncertainty.
To better position yourself with this in mind, later-stage businesses can look for alternative sources of capital, while new companies can consider getting a credit firm involved at the same time they’re looking for equity investors.
In a new piece for Forbes, Upper90 Co-Founder and CEO Billy Libby dove into how recent events are making capital diversification more important than ever. An excerpt is below, but we encourage you to read the full piece here.
As banks tighten risk and growth equity takes a back seat, there will likely be a continued liquidity crunch for startups. To better position themselves with this in mind, later-stage businesses can look for alternative sources of capital, while new companies can consider getting a credit firm involved at the same time they’re looking for equity investors.
Since 2018, I have been working with founders to bring asset-backed credit to their businesses earlier in their journey. I have seen how alternative capital structures can create positive outcomes for both the growth and exit of those who incorporated credit early. Having a wider range of options for growth allows founders to own more of their company and increase optionality in times of uncertainty.
The Institutional Dangers Of Commingling Startup Cash And Credit
By now, every founder and investor has become an expert in deposit insurance, maturity transformation and IntraFi. Founders have improved their banking relationships with an eye toward diversification and insurance coverage. From an institutional perspective, however, we need to acknowledge the risk of concentrating startup deposits and related startup loans under the same roof.
In a typical regional bank, the majority of loans are made with hard assets as collateral (real estate, autos, equipment). In the case of Silicon Valley Bank, a disproportionate number of loans were given to startups using future rounds of equity as collateral (i.e., venture debt). As the fallout continues, there is a greater need for firms that can help startups navigate the environment and deliver collateralized debt packages.
The Cost Of Overlooking Credit Financing
When equity is balanced with debt from the beginning, founders can still win if they exit for $100 million, since they’re more likely to still own a meaningful percentage. The goal is to create a healthier balance from the start and maintain that ratio over time.
For too long, credit has been viewed as a privilege, mainly available to later-stage companies. I believe that debt has a larger role to play at an earlier stage.
As many founders can attest, you can never get your equity back once you give it up. Retaining ownership earlier means significantly greater value and optionality as your business grows.