Introduction

Venture capital (VC) is often seen as the Holy Grail for founders with a big idea for their company. Having a great idea for a business is the start - but it isn't enough. You need capital to bring your idea to fruition. The quest for money to keep a dream - and a business - alive can be as consuming and stressful as the search for the technological breakthrough or market niche that will make a business viable and valuable. As you follow your dream, raising money is like walking a tightrope: one wrong step can be fatal.

Money, like everything else of value, comes at a price. For founders, the price often ends up being too high. In my 30 years of helping companies get the money they need to grow, I've seen too many really smart, hardworking entrepreneurs end up with too little to show for their blood, toil, tears, and sweat. Multiple rounds of equity investment from venture capitalists (VCs) can leave them with ownership stakes diluted to the point where they end up owning just a small fraction of the company they founded.

Reduced ownership stakes mean less profit for founders as well as for early-stage employees who trade low salaries for the promise of small equity stakes. It also means less control - less say in how a company is run, and less voice in its future (which could be an IPO, a sale to a strategic buyer, a merger, an acquisition of another company, or shutting down).

In my experience, the loss of control is often what disappoints and frustrates founders most. Entrepreneurs are driven by more than money; vision and purpose are what propel them to attempt the improbable and to keep going, on a path that is challenging at best.

Entrepreneurs aren't doomed to dilution and disappointment. There is more than one way to finance growth - and that's what I mean when I say, "all money is not created equal." The disparity in what different forms of financing can mean has profound implications for founders. Yet too little is known about all the forms of financing. Venture capital garners the most attention and share of mind, and it is the primary form of financing after a very early point in a company's lifecycle. But venture capital isn't the only choice, and it may not be the optimal one, especially at each step it's available. My goal in writing this book is to help founders understand the various options for financing, and how each could impact their business.

To people outside the somewhat cloistered world of Silicon Valley, the multimillion- (sometimes billion-) dollar figures that get thrown around are unimaginable. (I'm using "Silicon Valley" not just literally, but also figuratively, as it's as much a specific place as a stand-in for anywhere that has a vibrant innovation ecosystem - New York, Seattle, Boston, Austin, etc.) But these valuations aren't arbitrary. They're based on sophisticated methodologies that take into account intellectual property, current revenue, projections about growth and scalability, future profitability, and risk.

Risk is how venture capitalists justify getting so much equity, the amount of risk they take on being proportional to the potential reward. That's a fair point. But making sure investors who take risk early on get handsomely rewarded and allowing entrepreneurs to keep more control of their companies is not an either/or proposition.

This isn't a criticism of venture capitalists or the fundamentals of the venture-capital model. Many of the companies that have changed the way we live, work, communicate, and function in every aspect of our lives - individually and collectively, in business-to-business (B2B) and business-to-consumer (B2C) - would not have succeeded without venture capital. That's especially true of companies that have been formed within the past 30 years.

Venture capitalists are essential to the success of the U.S. innovation ecosystem, not only because of the money they provide, but also for the business acumen, connections, and cachet they bring to fledgling companies.

For many years, I was a venture capitalist, so I say this with conviction. Forbes put me on their "Midas List" of the most successful VCs several years running. My former colleagues and I did work I am proud of. I loved sitting on the boards of startup companies and helping entrepreneurs succeed; there was a rush knowing that the businesses we were financing could make a real difference.

But along the way I started to see that there was another way to help startups get much-needed capital, and that's through debt. Debt can take several different forms: it can be a loan against accounts receivable and/or inventory (an asset-based loan - ABL); an advance on predictable revenue (such as monthly recurring revenue - MRR); a percentage of future, less-predictable revenue (a revenue-based loan - RBL); or in the form of venture debt - loans to venture-backed companies that have yet to reach profitability. This can happen at almost any stage at which a company would consider taking venture capital. My company, Runway Growth Capital, makes loans to later-stage, pre-profit companies.

Using debt as an alternative to or in conjunction with raising additional venture capital is an unfamiliar concept to many people and consequently isn't used often enough. (To be clear, "venture capital" and "venture capitalists," i.e., "VCs," refer to providing equity to startups in exchange for an ownership stake in the company; "venture debt" and "venture lenders" refer to providing loans, which results in less dilution.)

Debt, like just about any other financial instrument, can be a lever, used to propel something forward, or it can be a hammer, brought down with enough force to be destructive. Taking debt at the appropriate time, under the right terms, from someone you've vetted as carefully as they've vetted you, can open a world of possibilities for you and your business.

While finalizing the manuscript for this book, something unthinkable happened. Silicon Valley Bank failed and was taken over by the FDIC following a run on the bank. Thousands of startups and VCs had rushed to withdraw their cash out of SVB amid worries that the bank's assets (severely impaired as a result of rapidly rising interest rates) would not be sufficient to cover its liabilities.

This will undoubtedly change the landscape and impact the way that startups are funded and manage their financial affairs. There will be more on this later in the book, and you will be able to find ongoing updates on the book's website.

I understand the pressures entrepreneurs face: worrying about meeting payroll, wondering if others will buy into your vision, and navigating the internal struggle between being convinced you have a great idea and being frustrated with the time it can take to nurture a growing company to success. While I have never run a technology startup, I have started several businesses as well as a number of investment funds.

I've had to face wrenching decisions about which team members to let go; how much risk I and the remaining team could and should continue to absorb; and there have been times that I've wondered whether it was all worth it. I've lost enough money to keep me awake at night and paid heavy prices personally: losing time with my children; enduring stress on my relationships; and seeing friendships suffer, either because I was too busy or because of the complications that arise when you inevitably become friends with people with whom you work.

My own experiences have given me valuable insights into the issues founders face, personally and professionally, and that's why I'm confident that this book will be helpful to you, regardless of what stage you and your business are at. If you've got an idea locked somewhere in your brain that you haven't brought to the surface yet, this will help you navigate the entire financial journey. If you're in the formative stage, still looking for your first funding, this book will be useful, because it's never too soon to start thinking about how to fund the scaleup that comes after the startup.

And if you've been around for a while, with a promising but still not profitable business, it's definitely time for you to think about alternatives for financing. Doing the same kind of deal again and again - taking dilutive rounds of venture capital - might not be the best solution for you and your business.

In All Money Is Not Created Equal, I'll give you an overview of the startup world: a look at the ecosystem, how money moves through it, how to evaluate capitalization options, and how to assess a funding partner, and I will help you understand the implications of different types of money.

Throughout the book, I'll be sharing my own experiences, such as bringing part of Runway Growth Capital public, as well as including stories about companies and deals that will bring various points to life. You'll also find a glossary of words and phrases commonly used in the world of startups and VCs.

You won't find advice on how to be a great leader or the latest thinking in management. There are scores of excellent books already written on how to manage your team. But I will tell you what to be aware of as you build your team and offer advice on how to manage yourself - what you need to think about, consider,...