As a fund with functions to invest equity and or loan a debt, how would go about choosing what mixture of capital to give to a growing company (say early stage)? I’m a bit lost as to what metrics I should consider, and what would be the reasons for choosing equity over debt, debt over equity, or mixture of both?
If the company in question is promising, I would think investing both equity and debt would be beneficial in order to capture the upside as well as protect the downside, but I would like to know if there are specific metrics I could look at to decide what % of which I should invest/lend.
Thank you!
When you say equity, I'm going to assume you mean Prefs and SAFEs/converts, and when you say debt I'm going to assume you mean venture debt. The rule of thumb with venture debt is it's very predatory, and most companies willing to accept venture debt aren't usually first pick for investment. Most venture debt providers are experts at finding situations where the company is having difficulty raising equity, but where capital is a key way to unlock some important value that moves the needle for traditional investors. There were also some clever instruments I've seen that directly funded paid advertising spend (where there is a proven paid advertising motion) where the provider took some % of the upside. The only real exception is usually fintech companies that need large credit facilities to make some of their products work, the return is more modest, but the risk is also lower.
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