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February 17, 2025
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Entrepreneurship is fundamentally about managing constraints—resources, talent, and time. For founders, the art lies in optimizing these elements to drive growth while attracting the right team. This challenge becomes particularly acute during the growth stage, where the need for capital is critical to support expansion, product development, and market penetration.
An early stage startup needs capital for various purposes — to hire the initial team, to build product, to setup sales, marketing, distribution and operations functions, to procure raw materials and the list goes on. While many founders tend to gravitate towards equity-based capital as the default and the only choice available, it’s important for founders to remain cognisant of other possible sources of capital at various stages and smartly allocate the right blend to achieve maximum impact in terms of scale, growth and revenue. Let’s discuss the various possible sources of capital in this article
Capital, after a good team, is the next big leverage that the startup can put to work to create significant value.
Startups at an early stage do not have many choices to raise capital. They have no customers and hence no revenue. They do not have a track record and hence no lenders. It is at this stage, they need a set of true believers who are willing to take a high amount of risk and participate as partners or shareholders in the business. These investors form the equity investors in the company who receive a share in the company’s valuation and profits. They are typically long term investors who expect to make large amount of returns for the high amount of risk they are willing to take.
Founders must realize that equity is the most expensive form of capital as founders are giving their valuable shareholding to an equity investor every-time they raise funds. Abusing this source is counterproductive for everyone in the long run as founders gradually lose skin-in-the-game and along with it, the incentive to grow the venture.
Thumb Rule: Use equity capital for the highest leverage items — spends that give them maximum ROI for the longest period of time. Hence product, leadership team, fixed assets etc. are direct candidates, while other costs should ideally be avoided over a period of time.
Sources: Founders (Bootstrap), Angels, Incubators, Accelerators, Seed Funds, VCs, PEs
For startups with established revenue streams, debt offers a non-dilutive alternative. It's crucial to approach debt with caution, ensuring there's a clear strategy for repayment aligned with projected revenue growth.
By nature of the instrument, most startups don’t qualify for debt — lenders typically require a certain period of track-record as well as a particular threshold of balance sheet strength. Also, unlike equity, debt comes with a legal compulsion to payback the principal along with the accrued interest in the stipulated time, failing which, the startup is pushed into default and liquidation. Debt while desired, is a double edged sword — one should sport it only if one can wield it!
Thumb Rule: Raise debt only for items that have a predictable cashflow to repay it back along with interest.
Sources: Banks, NBFCs, Venture Debt Funds, Channel Partners, Government Bodies
Grants are a great way to fuel your initial journey. Grants as the word indicates is an equity-free, one-way grant of money, and in many cases — with no-strings-attached. Basically it’s free money, a windfall you never expected. While one can’t predict grants in a business plan, once you get it, you can definitely use it to take you to the next logical orbital.
Many startups have leveraged grants effectively to launch new initiatives, kickstart new product lines or open-up new markets. Grants can also be used to undertake a few high risk bets that has a large payoff potential.
Most grant programs are selected based on an application process. To maxinise one’s chances to get a grant or an award, one needs to apply to several grant programs over time to eventually get lucky. So it is advisable to keep those standard answers about your startup ready and get interns to continuously apply to these programs.
Sources: Govt. schemes, CSR and Corporate Grants as part of accelerator and social impact programs, awards and competitions etc.
Before we conclude, let’s explore another form of non-dilutive financing which can prove to be an optimal form of funding for growth stage startups.
Revenue based financing (RBF) is the ability of a startup to convert a company's future projected revenue into upfront funding.
Funders basically look at the booked revenue or recurring revenue (typically in SaaS) and get a certain percentage of the recurring revenue as upfront financing which needs to be repaid in instalments linked to the revenue of the company until a certain return amount or percentage is achieved for the investor.
The advantage of RBF is that it is a hybrid instrument. It is not equity on one side and it is also not purely debt on the other and it straddles beautifully in between. So you don’t need to dilute equity while you might not be forced to pay in case you are not making a revenue as the instalments are revenue linked. For this flexibility, startups need to typically shell out a larger return than debt, however it is not expensive as equity. This flexibility can be quite handy for companies looking to get some upfront cash to manage and grow their operations.
To sum up, appreciating the various sources of capital is extremely important for an early stage startup founder. While one might not have the luxury to choose at the stage one is in, it’ll help founders to keep an eye out for leveraging future opportunities, internally prepare your organization to qualify for certain categories of capital and also have a mental picture of where to use different sources of capital as you scale your venture.
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