The Blog

Musings on corporate finance, fund raising, capital markets and other matters

Why not have a larger share of a much bigger pie?
“Non-dilutive financing is the type of capital acquisition that does not require you to give up shares of your business”,
Scott Shane, Case Western Reserve University

Dilutive financing may be common place and expected in the world of technology start-ups. But for a regional family run business, the idea of having to give up some of your child’s future inheritance can be daunting. Nevertheless, the prospect of additional capital enabling growth at a rate that far exceeds normal organic levels, is often a large enough incentive for most businesses to consider diluting their holdings. A smaller share of a much bigger pie is very enticing.

But what do you do when dilutive financing is not an option and you want to control as much of the “the pie” as possible? You head to the private lending market.

There are two options available, but each option reflects a business at very different stages of growth:

1) Venture Debt:

A type of debt financing that is provided to early stage companies, normally after the first round or alongside the second round of venture capital funding. Most lenders do not require the company to be profitable at this stage, but there should be a clear path to profitability.

Cost: Low to mid double digit coupon, with low to high double digit warrant (as percentage of the raise).

Uses What to watch our for
  • Acts as a bridge to cover the cash shortfall until profitability
  • How do you plan on repaying the loan? Is there a clear path to repayment?
  • Covering large capital outlays, such as an acquisition, or other short-term cash needs
  • Is the loan structured in line with your repayment plan?
  • Enables owners to raise finance without setting a valuation
  • How will the terms and covenants affect your ability to trade and make decisions?

2) Growth Capital:

A loan that is issued to more profitable and established companies, where there is an opportunity to significantly ramp up growth and/or take advantage of a unique opportunity.

Cost: Mid single digit to low teens coupon, with low to mid single digit warrant (as percentage of the raise).

Uses What to watch our for
  • Expansion capital, to fund new products, enter new countries etc.
  • Will your increase in sales cover the interest?
  • Funding the restructuring of operations
  • If non-amortising, how do you plan on repaying the loan at maturity?
  • Taking advantage of acquisitions and MBO opportunities
  • How strict are the financial covenants, do they restrict your ability to trade?

Using venture and growth capital as a source of finance is not cheap, but this cost is offset by the flexibility of borrowing, the uses of finance, and how it enables you to take advantage of opportunities and outperform your competitors.

In the end, both sources of financing involve some form of profit participation, but it is still significantly less than venture capital and private equity. Most lenders do not even look to have a seat on the board. Ultimately, you are still in complete control of your company and if all goes to plan, you will end up with a much larger share of a much bigger pie.


Feinstein, B., Netterfield, C. and Miller, A. (n.d.). Ten Questions Every Founder Should Ask before Raising Venture Debt. Bessemer Venture Partners.

Shane, S. (2017). Why Entrepreneurs Should Think About Non-Dilutive Financing.