A Dilution Calculator to Compare Equity Funding vs. Revenue Based Funding

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A Calculator To Compare Equity Funding Vs. Revenue-Based Funding

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With access to bank lending generally not available because the business is either too young with no track record, loss making because in its growth phase, or too risky as judged by traditional financial metrics, or a combination of the three, the only readily available source of financing for startups is either a bootstrap or raising venture capital. Whilst the former is rare – you need to be profitable and self-fund your growth, the latter is a lot more common and is generally the path many startups choose to follow.

 

The problem with venture capital funding is that it is extremely expensive. For successful startups, early investors can make annualized returns well in excess of 100%, which means that the founding team would have paid those investors that order of magnitude cost of capital through equity dilution. Imagine if you could materially reduce that cost of capital by using an alternative source of financing that has a fixed fee associated with it as opposed to the structure inherent to venture capital, which dictates that the more successful your company is, the higher your cost of capital.

 

By way of illustration, imagine you are raising a €10 million Series A round at €40 million pre-money valuation (i.e. €50 million post-money), and that Series A investors would therefore end with 20% of your company. Now imagine that instead of raising €10 million of venture capital, you raise €5 million of venture capital and use Valerian for the remaining €5 million. Keeping the pre-money valuation constant, you have now only sold 10% of your company and your dilution is 50% lower.

 

The €5 million you have raised with Valerian will be disbursed over the next few years on an as-needed basis, in order to fund your digital marketing strategy. The cost of that capital will be a fixed fee of between 5% and 10% – a fee known in advance and that does not change. In this scenario, you end up in the same position as before (you have raised a total of €10 million to finance growth), but your dilution has been cut in half. Depending on what valuation you will eventually provide an exit to your Series A investors, 10% of that value would accrue to you instead of to them, not a bad proposition indeed.

 

The previous scenario assumed that you substituted venture capital for a Valerian Advance. What if you supplemented venture capital with a Valerian Advance? In that scenario, the benefit would also accrue to the founding team on the basis that the Valerian Advance, used to fund a digital marketing campaign, would result in incremental sales. This faster growth would result in a higher valuation at a subsequent funding round, leading to a lower dilution for existing shareholders. In that sense, all existing investors have aligned interests in making sure the company grows as fast as possible, which a Valerian Advance makes possible.

 

For more information on Valerian or to see how efficient you are with your marketing spend, please visit: valerianfunds.com/getfunded

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