For startup founders, growth is the name of the game. Whether your mission is to change the world, build financial success, or both. But scaling your business requires a significant amount of capital, often more than many anticipate. For SaaS companies, non-dilutive capital can be a game-changer, especially in today’s funding environment. Jannis Koehn, Float’s co-founder, shares his perspective on why debt financing is worth a closer look and how it can support startups in various stages of growth.
Why Early-Stage Startups Burn Capital
Jannis explains the financial demands of startups by likening them to his newborn daughter, Annelie. Just as a baby needs constant care, attention, and investment before she can stand on her own two feet, startups require early investment to reach a self-sustaining state. Traditionally, the venture capital model has been the primary way to fund this growth, fueling explosive progress within the startup ecosystem over the past two decades. However, the rapid growth of VC funding in recent years took a hit in 2022 due to rising interest rates and macroeconomic shifts, significantly slowing down the flow of investment.
With VC funds drying up, Jannis found himself reflecting on how companies were funded before venture capital became mainstream in the 1970s. He discovered that, in fact, many early-stage businesses historically relied on debt to fund their expansion. Consider Siemens, founded in 1847, which secured a loan eight years later to break into the Russian market.
Similarly, Heineken and Philips expanded using debt in the 1800s, allowing their founders to retain ownership and become wealthy without diluting their stakes.
Understanding when non-dilutive capital makes sense
VC funding isn’t the only way to grow a startup, and it may not even be the right choice for all businesses. To be a true VC case, a startup generally needs a massive total addressable market and the potential for hyper-growth, with the aim of becoming a “fund-returner.” In other words, one unicorn must generate enough value to offset losses from other high-risk investments within a VC’s portfolio.
However, not every startup is suited for this model. Many founders are more focused on building a sustainable, life-changing business rather than aiming to become the next Google. For companies with more moderate risk profiles and efficient growth strategies, credit can be an excellent source of funding. Float has identified three primary use cases where credit can be especially beneficial for SaaS startups:
1. Boosting growth for established go-to-market models
If your SaaS startup has a successful go-to-market model, credit can help accelerate growth by funding activities directly linked to revenue generation, like hiring more salespeople or scaling product development. This isn’t about high-risk bets like launching in untested markets; it’s about scaling what’s already proven to work.
Jannis shares the story of a German SaaS client who used Float’s financing to fuel a data-backed growth strategy. By running a detailed financial model that accounted for churn, they calculated that the loan would provide 8-12 months of cash flow, funding their marketing efforts and paying back the loan before it matured. This allowed them to reinvest in growth incrementally, setting up a “machine” of sorts to reach new heights with each loan cycle.
2. Bridging short-term cash gaps
SaaS companies often face seasonal revenue cycles or payment lags, especially if they work with annual contracts. This can leave a startup in a tight cash position between high-revenue months, creating a need for a “bridge.” Rather than issuing shares to cover a temporary shortfall, credit can provide the flexibility to cover these gaps without dilution.
Jannis points out that many SaaS companies earn a substantial portion of their revenue at specific times of the year. For example, a company might bring in 50% of its revenue between September and October, but then experience a lull in cash flow over the summer months. A short-term loan of three to six months can provide a bridge to ensure that the business stays financially stable until its next revenue peak.
3. Extending runway to hit key milestones
One of the most strategic uses of credit in Jannis’s view is to extend a company’s financial runway, either to reach profitability or to delay a funding round until conditions are more favorable.
Take the example of a Swiss startup on the cusp of profitability. With just nine months left until it could break even, the founder used FLOAT’s credit line to cover declining losses, ensuring they didn’t have to raise an additional round. Similarly, another Dutch client used a six-month loan to hold off on a Series A funding round, giving them extra time to negotiate better terms without the pressure of a looming cash crunch.
The ROI of non-dilutive capital
FLOAT offers an ROI calculator that helps founders see how credit could impact their growth. For example, let’s say using credit gives you an additional six to eight months to scale. By the end of that period, your valuation may have increased significantly. In nearly every case, the value created by delaying equity dilution more than covers the cost of debt, resulting in an impressive 20-40x ROI for founders who leverage credit strategically.
Key Takeaways
- No one-size-fits-all capital: Different types of funding serve different purposes. Knowing when to use credit versus equity is essential.
- Non-dilutive capital is a valuable tool: Debt financing can create significant value, especially when used for growth acceleration and runway extension.
- Credit as a foundational tool: Credit should be part of every founder’s toolkit, ready to be drawn upon when needed.
- Consider flexibility and accessibility: Credit options vary greatly, so founders should seek solutions that provide flexibility, easy access, and terms that support business growth without operational disruption.
For founders navigating growth challenges, tapping into these funds means preserving ownership, staying agile, and setting the stage for long-term success. As the pace of innovation continues, understanding when and how to leverage debt could be the key to building a resilient, future-ready business.
