There are several reasons why founders might not embrace venture financing (venture debt) to get their product created and to build the company. Here are some of the most common:
- Lack of understanding: Venture capital gets all the fanfare, so venture debt is less well-known and understood. Venture debt sits somewhere in between bootstrapping and raising venture capital, so it is the least sexy and talked about of the three. Therefore, there aren’t mounds of blogs, podcasts, and posts about it, and less visible things are less understood.
- Accountability: Venture debt gets repaid, which can scare some founders away from it because they want to avoid being held responsible for repaying it. This is one of the primary differences between venture debt and venture capital. With venture capital, there is an exchange of money for equity. This equity exchange doesn’t have to exist with venture debt unless the debt is converted to equity. For many founders, giving up equity is a safer and less committed path for those who can raise venture capital than having the accountability of repaying venture debt. However, this can be a sign of a less than confident and committed founder because if they aren’t willing to be held accountable for their and the company’s performance, are they really that capable and committed?
- Independence: Founders don’t want to feel tied to and independent of a third party, but guess what? Taking investment creates dependency, and a board of directors, often made up of venture capitalists who have invested in a company, ultimately controls the company and can even choose to fire the founder(s). See OpenAI fiasco. Venture debt establishes a financial dependency, but it isn’t different than a company taking out a line of credit with a bank or charging things on a credit card. All financial funding mechanisms come with some level and type of dependency.
- Partners: Founders want to believe that investors are partnering with them on the business. In some cases, this is true, and when it works, magic can happen. However, founders need to realize that investors invest in their business, and ultimately, an investment for many is a financial transaction. Founders naively viewing investors as partners and friends can also cause them to look at venture and product financing as a financial transaction, which is happening with most venture capital investments.
Venture debt and product financing are only for some startups, and founders should be considerate of all funding and financing options. Still, for some financing, product work can be the best path if founders understand and embrace it.