As companies stay private longer, alternative capital becomes increasingly attractive
The capital market for startups has perhaps never been more attractive than it is today. Not only are venture capitalists raising more capital than ever, but new methods of financing startup activity are maturing. The result is a capital market that is increasingly competitive for startup attention, and business, which may lead to better prices for founders and their startups.
Venture debt is not new, but twists on this model are taking new prominence in how startups pay for their growth, for example.
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The expanding value of what young technology companies create could be helping change the market for how they are financed: Many tech startups build software, and the value of software revenues has grown in recent quarters. This means that when startups grow their revenues, they generate more value than in times past. In turn, that bolsters the value of shares in the company more rapidly than in previous market cycles.
Selling equity, then, is more costly than before. That fact may lead to startups not wanting to pursue equity-only transactions when possible. Why? Because if a company can borrow capital at rock-bottom effective rates, it will nearly always prove more inexpensive over the long-term than selling shares in its business that have essentially uncapped upside.
TechCrunch held a panel on revenue-based financing at Disrupt the other week, from which we’ve pulled a number of quotes to help frame our thinking around venture capital investment, and when startups may want to pursue other methods of funding.
With alternative capital concerns like Pipe attracting top talent while expanding to new markets, and Clearbanc rebranding to Clearco while raising $100 million earlier this year, it’s clear that the market for funds outside of traditional venture checks is maturing. Let’s talk about it.
Not just SaaS
While we tend to view the larger startup market through the prism of software, the recent Warby Parker public offering makes it clear that venture-level returns are possible for companies with a number of business models.