This blog has led to action - make sure to visit the

Wednesday, March 11, 2009

The cost of VC funding versus debt

Just read an interesting article from "The Vest Pocket Consultant" discussing fund raising in the current economy, and how we are in a buyer's market, people with money have the negotiating power.
One example in the article is the case of a startup that was offered $2M for 20% of the company, and that went public one year later with a $300M market cap.
While $2M for 20% could look reasonable these days, and even though we are talking about a very specific case, it is interesting to consider the cost of money in this example: the $2M worth of stock were valued at $60M the following year, so this is a 3000% interest rate. And then you realize in retrospect that if you can find $2M at 25% or even 30% interest rate, you are left much richer at the end of the game. AND you do not have to deal with people on your board, a higher cost of transaction (stock deals are more complicated than loans from a legal prospective). Unless you do not mind leaving $57M on the table, this is clearly an option worth looking at.
While this is an extreme example, it is always good to keep this in mind...

Would you like to rate me?