Better Late: How Debt Can Assist Late-Stage Start-Ups

It’s no secret that tech start-ups do not fall from the minds of their founders fully born; they evolve in stages, following a similar path. Understanding these stages can help companies know what types of additional funding to seek, and most importantly, when to seek it.

An early-stage tech start-up is defined by potential. Its unproven product is still in its nascent stages and may be in beta or test versions. Staffing and go-to-market strategies are still being developed. Equity and seed capital are common choices for early funding.

A middle-stage start-up isn’t concerned about showing market viability—its only concern is growth. This can come by pursuing investment capital, venture funding or preferred equity, or a combination thereof.

Late-stage tech start-ups have developed their core product, focused their target market, and have a proven business model and revenue stream. Now it’s all about performance. Depending on what their business goals are, they have a variety of funding options. But when do they seek them? At what point? It may help to consider this key criteria:

• Do you plan on expanding into new markets? New geographies? Can you fund that expansion?

• Is your product well-known and familiar to consumers?

• Do you have positive cash flow?

• Are you looking to acquire or invest in other companies? Work with new partners?

• Are you considering an IPO?

If you answered yes to any of those, you’re probably a late-stage start-up. For these companies, debt is an appealing prospect. It can not only help develop business initiatives without surrendering equity, but also preserve a company’s bottom line, since the debt taken does not dilute valuation, keeping the path to growth optimal.

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Here’s some examples of late era tech start-ups and the debt and growth opportunities they embraced:

Identity management start-up OneLogin was struggling after a security breach in 2017. With little cash on hand, new CEO Brad Brooks took out a $26M loan that required the company to hit performance milestones as they entered new markets. “Debt is the invisible hand that forces harder conversations,” Brooks said. The loan helped OneLogin regain its footing. It was eventually acquired by a subsidiary of Quest Software for an estimated $500M.

Looking to recover from COVID-19 supply chain issues, enterprise software company Fractory raised $9M in 2021. The funding was led by OTB Ventures and helped Fractory expand its technology, streamline manufacturing and bring in additional partners.

The vision behind Grover, a Berlin-based consumer technology subscription company that rents computers, smartphones, and gaming consoles, was to allow people to have access to tech without going into debt. And the way they made it happen was by taking on debt themselves—with $260M of financing made possible by international asset manager M&G. The loan allowed Grover to expand its product inventory, enter new European markets, and grow its customer base by 50% since the beginning of 2022.

If your tech startup is considering its next move, it will help to turn your vision inward and understand what stage of development you’re at. That way, you can make the right decisions to ensure you meet your performance goals, raise profits and grow your business further.

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