This Business News Story Was Uncovered By Us From: http://www.youngupstarts.com/2019/07/31/fundraising-debt-and-how-to-avoid-it/
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by Anish Sebastian and Juan Pablo Segura, co-founders of Babyscripts
Ten years ago, Ward Cunningham published a Youtube video that introduced the concept of “technical debt” to the world. It has become an established term in the software industry to indicate the short term fixes of quick and dirty coding that can create problems down the road — problems that come knocking at the door to collect with interest. Cunningham’s term was coined to identify a specific problem in the tech industry, but the fundamental concept is universal — Ben Horowitz, for example, took Cunningham’s concept and applied it to management structures.
Essentially, the concept boils down to making a decision that solves the problem of the moment but is not ultimately scalable, borrowing against the future to fix the short term issues. The kicker, of course, is that at some point you have to pay that debt down to actually scale.
For start-ups in hot markets, the problem also manifests itself in fundraising. Billions of dollars are being poured into companies that have yet to clear the value chasm, as entrepreneurs use early traction that isn’t necessarily financially-oriented, but shows a certain level of uptick or success, to raise capital and convince early stage investors that their horse is the one to bet on.
Of course, a certain amount of initial capital without financial performance is absolutely necessary to get a business off the ground, especially in regulated industries. Founders need seed capital to get their operations up and running, and to begin generating revenue. They need to comply with laws, create back-end processes, and build prototypes — all of which cost money.
But “fundraising debt” comes into the picture when you raise too much to… Read More
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