Empowering Better Tech Investments: How alternative financing enhances venture capital funding

Tamar Katz

Venture funding often takes the limelight, and rightfully so. It facilitates new and exciting businesses and uncovers new opportunities. That said, no one ever said securing venture funding was easy. It’s often a long process that requires a great deal of time and focus to be diverted from the leadership team. Whether you’re just entering your first round or raising later stage funding, you’re already aware of the complexities that come with navigating this critical step to supporting your company’s growth.

What if there was an alternative source of financing that could support you between funding rounds and pair well with your VC strategy?

The financial landscape for startups continues to evolve. Over the past two years specifically, founders have witnessed some of the biggest changes.

Global venture capital funding has become harder to attain, exacerbating the already known hurdle that VC funding is the most sought after but also the most challenging to acquire.
Startups must plan for longer runway as average time between funding rounds grows.
To remain competitive, revenue growth and profitability are even more crucial to securing VC funding.

Venture capital will be essential to a startup’s roadmap and success, but it’s not always an option or the right answer to every need. Startups who diversify their funding strategies are more prepared for economic shifts and better optimized for scaling their business.

Alternative financing acts as a flywheel to your overall funding strategy. It provides access to non-dilutive capital to fund important purchases (such as key technology) and fuel top line growth. Startups, especially those going through their growth phase, should compile a thoughtful and strategic capital stack by leveraging equity funding and debt financing together in a complementary manner.

Navigating The Challenges of Traditional Forms of Funding

Venture capitalists have raised their expectations. They want to see higher revenue before committing to more funding. Five years ago, the minimum for raising a Series A funding round measured at approximately $1M annual recurring revenue (ARR). Now, the ARR target for series A is between 50% to 100% higher ($1.5M and $2M ARR). In addition to higher scrutiny of ARR, investment sums have trended lower alongside valuations.

The underlying feedback from investors and founders closing funding rounds has been focused on a company's ability to communicate their roadmap to profitability and increased revenue. Investors want to hear how founders expect to overcome any challenges that may arise during growth periods and how they plan to manage their burn rate during that timespan.

Key discussions right now are circling around how founders leverage alternative funding options, extend runway, and strategize how to leverage alternative financing to stimulate company growth and drive increased revenue quickly.

Leveraging Alternative Financing as an Innovative Approach to Funding

Alternative financing is not competitive to VC funding, it’s supplementary. There are many different forms of alternative financing that can be leveraged in conjunction with venture capital to provide additional means for achieving goals and hitting targets. The secret is in knowing which alternative financing method to use and when.

Debt financing in particular empowers you to make better investments in your business. For example, as you purchase technology to support your current endeavors or to facilitate new growth, those purchases can be done in ways that stabilize your burn rate and improve your cashflow. With Gynger, using debt financing for your tech spend means access to flexible repayment terms and the ability to negotiate better deals.

How Companies Succeed with Alternative Financing

By utilizing debt financing through Gynger, Cylera was able to offset their high customer acquisition and onboarding costs all while improving their capital efficiency. Making payments for their cloud/technology purchases quarterly instead of monthly allowed them to preserve the cash they needed to grow and align expenses with their customers' payment terms.

The success of an alternative financing strategy comes from including it in company growth plans. The goal is to leverage the right financing for the right initiatives, and debt financing aligns well with powering strategic technology investments.

With the right financing methods established, you can optimize for purchasing the right tools for your company rather than just the ones that are most affordable right now.. You can also gain access to technologies that facilitate faster growth more quickly, instead of waiting for certain revenue milestones to be ready to make those investments.

The Benefits of Alternative Financing and Debt Financing

Financial Benefits of Alternative Financing:

Extendrunway
Normalize burn rate
Improve cashflow and capital efficiency

Strategic Benefits of Debt Financing:

Speed: Quick access to capital - Gynger issues credit decisions within 24-hours
Flexibility: Custom payment terms tied to each invoice financed
Ownership: Non-dilutive capital to minimize dilution

Integrating Alternative Financing for Tech Purchases into Your Funding Strategy

Venture capital is the foundational backbone to a startup’s finances, and alternative financing is a perfect compliment to VC funding when purchasing key technology your company needs. Instead of reducing your cash-on-hand with each expense, it is possible to invest in the tools your company needs now while maintaining liquid funds for other strategic investments.

A mix of VC and debt financing is key to a healthy capital stack that mitigates dilution and improves cashflow.

When are the right moments to leverage debt financing?

Debt Financing for Seed to Series A

Goals: Increase revenue and extend runway as much as possible

Debt financing can help delay heavy upfront payments needed to get your business off of the ground. Your freed up cash can be used on strategic investments that will grow revenue. It also steadies burn rate, making it possible to extend runway as to delay your next round of VC funding until you’re ready. These together support you in proving to investors you’re capable of establishing a predictable revenue model and healthy capital efficiency.

Debt Financing for Series A to Series B

Goals: Company scaling, employee hiring and customer expansion

You’ve landed, and now you’re expanding. In earlier growth periods, the company may have acquired technology that isn’t being used or was purchased with contracts that are no longer optimal for your size/use case. Debt financing helps with negotiating better terms up front, as you consolidate and focus your tech investments.

It will also help you as you scale and increase your customer base. You will be able to purchase technology with the right packages/contracts to ensure you’ve optimized pricing. The overall focus is on increasing your technology ROI.

Debt Financing for Series B and Further Funding

Goals: Product innovation, acquisitions, and market expansion

As you grow into new markets and develop new products, you need capital available to fund these endeavors. Debt financing allows your company to spread out critical large technology expenses over longer periods of time. With your expenses deferred and burn stabilized, you can focus the company’s funds on expansion

Explore financing options by technology type: Software, Cloud, Hardware

Enhancing VC Funding with Alternative Financing Leads to Healthy Financial Diversification

You could use venture capital funding on its own , but why would you? VC funds and debt financing work better together. VC funding supplies the initial cash injection and debt financing supports you in managing that cash wisely so you can focus on growth. That’s where debt financing enables you to accelerate your flywheel.

Debt financing isn’t just for one purchase or one decision. It should be a part of your overall capital strategy and baked into your long term plan. Startups who leverage innovative approaches to diversifying their capital stack feel more stable while also being more agile.

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