Chasing the Capital

It comes to no surprise to most people that virtually all early stage technology-based companies are in need of more money.  Even after companies raise money, they are often looking quickly for where the next grant or round of financing is going to come from.  High growth companies that are more established often weigh how much cash should be allocated to marketing and sales versus research and development and augmenting their product pipeline. 

Below is a list of some of the traditional sources of capital for high growth companies.  Most companies use at least two of these methods at any given time and it is not uncommon for companies to use all of them at some point in their life cycle.

Equity Capital

This includes investor money from friends, family members, wealthy acquaintances, venture capitalists, hedge and pension funds, and the public at large.  While not viewed this way by many, in most cases, it is the most expensive form of capital for successful companies.

Federal and State Grants and Loans

Probably the cheapest form of capital is federal and state grants.  For small technology companies, SBIR and STTR grants are often their main sources of capital.  Even for early stage tech companies that rely on investor money, they often supplement investor money with grant funds.  For later stage companies, government grants and loans often amount to only a small portion (or no portion) of their incoming capital.

Debt and Equipment Leasing

With the exception of convertible debt, debt obligations issued to insiders, and certain government-sponsored debt, significant debt financing is typically reserved for large companies that are cash-flow positive or that have a significant asset base

Strategic Alliances or Partnership Arrangements

Entering into a strategic alliance or other form of partnering arrangement is a common way for a number of companies to raise capital during the development stage, especially those that are in the pharmaceutical or other high development cost industries.  In exchange for some form of exclusivity or option for exclusivity, these arrangements frequently have a large up-front payment or the costs of development, testing and clinical trials are borne by the larger company.  Most often, continued payments are conditioned upon meeting pre-defined milestones.  Sometimes, these arrangements entail the larger company adopting a technology or platform (at reduced or no cost or in exchange for equity of the smaller company) in an effort to make the technology or platform an industry standard.

We’re going to spend a lot of time on this blog addressing financing issues.  Over the next several posts, we’ll go over some of the details on each of the areas, emphasizing current strategies that companies are using as well as current market terms in light of the tight capital markets.  We’ll also conduct some interviews with industry players and seasoned entrepreneurs to get their perspective and advice.

2 thoughts on “Chasing the Capital”

  1. Look forward to your posts. If you would elaborate on friends and family financings. For example, how do I set the valuation and terms?

  2. Thank you for doing this. I look forward to following your blog. I would like to see some industry specs as it relates to fundraising and the impact our slowing economy has had.

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