7 debt fundraising tips for early stage founders

While all founders are very familiar with raising equity funding (except perhaps those that are fortunate enough to have a substantial amount of their own capital), in the world of fintech many founders also need to raise that other form of capital — debt.

This is especially true if the fintech business is a lending business — in that case debt basically becomes a cost of goods sold (or COGS) and being able to raise it effectively and at favorable terms becomes a big determinator of success and profitability.

The bigger your company and the longer your track record, the easier it is to raise debt on favorable terms. However, when you are first starting out you may have neither of those factors working in your favor — and your thousand mile journey needs to start with that first step.

At QED Investors, we have seen and helped many an early stage founder raise debt successfully in exactly such circumstances, and we have learned a lot along the way which we are happy to share with the fintech community.

1. Start early

If you are an early stage startup and know that you will require to have debt to support your business, start your conversations with banks and debt funds as early as possible. Yes, the process to raise debt may only take three or four months, but we would recommend starting conversations much sooner than that. This enables you to start building a relationship sooner, and also lets you start assessing how good of a relationship you can build with that fund. Most importantly, it also removes the time pressure from your conversations, making progress more likely.

2. Build strong relationships

Compared to raising equity, a debt fundraise may feel more transactional, but this does not mean that relationships do not matter. On the contrary, relationships count for a lot, and if something goes wrong in the future, the relationship you have built with the banker or investment professional at the debt fund will become crucial. Treat them no different than you would your board members or equity investors.

3.Create competitive tension, but don’t overdo it

There may be many banks and debt funds out there, and talking to a few to create competitive tension in order to get good pricing makes a lot of sense. However, there is a risk in damaging the relationship if you overdo this. A better strategy is to start a conversation with a handful of potential partners, and once narrowed down, tell your top choice partner that you are going to go with them and are now not talking to the other parties. This builds trust and will likely result in the debt funder spending more time with you. If, contrary to this, if you make the debt providers compete with each other down to the smallest basis point, it may very well come back to bite you in the future if you need them to help you out in any way.

4. Tell them what you are going to do, and then do it

As you are an early stage company, the debt funds and banks rightfully see you as a very risky proposition. And unlike equity investors that have unlimited upside in your business, debt funds only have a limited upside, but can still lose all their capital. Hence, convincing them that you are a trustworthy counterpart is absolutely paramount. One good way to do this is to share your near-term goals with them, and then deliver on those goals. The secret here is to share only those goals you are virtually sure you will in fact deliver. So once you have visibility on something that will happen (or has already started to happen) share this with the debt fund as a goal, and then a month later let them know that the mission was accomplished. The other benefit of doing this is that it sets the foundation for good communication going forward, which is equally important.

5. Choose the right partner

There are many debt providers out there, so it is important to remember that there are different horses for different courses. If you are a pre-seed stage company that needs five million in debt funding, going to a big money center bank may not make sense. Instead approach family offices and debt funds that specialize in such funding amounts. At QED Investors we have a long list of such contacts in all our global markets and routinely connect our founders to the relevant parties depending on what is needed in each unique situation. Any other good VC should equally be able to help you in this endeavor.

6. Choose the right structure

Just like choosing the right partner is very important, choosing the right debt structure is equally important. If a low price is very important to you, you may want to go for a structured finance solution, which while imposing operational constraints on you, will likely result in the lowest price. If, on the other hand, you want to be very capital efficient, you need to go with a structure that has a high Loan to Value (LTV), and you may be able to get this from family offices, but it may result in higher rates of interest. Again, any good fintech fund should be able to help you think through the tradeoffs in these kinds of situations.

7. Ask for help

Nobody has all the answers, and you should ask your equity investors for help in sorting out all these tradeoffs and questions. Equally important, you should get good subject matter experts as advisors, as they can help you with different parts of the process, from finding the right debt provider to help you negotiate the terms of a complicated term sheet. Another advantage is that such advisors can make the ideal “bad cops” during a negotiation, letting you preserve that valuable relationship you have built with your funder.

These are just some of the tips that we have come to understand deeply over the years. We hope sharing them is valuable for the community, as the first fundraise sets the foundation for future ones, and getting it right means one less thing to worry about for a busy founder.

‍