

Ask HN: Why is VC better than taking out a loan for my startup? - noduerme

...assuming the business model will bring in 75% ROI the first year and 150% the second?
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trussi
The downside of a loan is that it will require a personal guarantee, which
means you're personally liable to pay it back. If the business fails (or more
specifically the business is unable to make the loan payments and defaults on
the loan), it will negatively affect your credit. Ruining your credit isn't as
bad as most people make it out to be, especially if you're young and can
endure 7 years with only paying cash for everything (it's a good lesson to
learn young).

Assuming your venture is successful, the huge upside to a loan is that it's
the cheapest money you can possibly get. Even at something like a crazy 16%
interest rate on hard money leg-breaker type loans, it's way cheaper than
giving away 10-40% of your company to get VC money.

The other upside to a loan is that you have WAY more flexibility in the
direction of your company, especially in terms of exit timelines. Everybody
(i.e. those in the VC bubble) bashes 'lifestyle' businesses, but it's hard to
turn your nose up at $10-50K per month in passive income. With VC money, you
are forced into pursuing very fast and hard growth which generally sucks (from
a founder perspective). With a loan, you can grow nice and slow and
comfortably or you can go balls to the wall...it's your choice.

With that said, the absolute best investors are customers. Leave yourself a
35-50% financial buffer, but only borrow enough to get to profitability
through revenue. If you can hit that magical moment, it's as close to nirvana
as most of us will ever get. :)

~~~
noduerme
I like this advice, a lot. My startup's not really a web startup -- per se --
it requires a lot of hardware, licenses, etc. All of which we're ready to get.
If it were a simple web service I'd launch it now and just see what happened
;)

Obviously, spending a lot on hardware and licenses up front means we need more
than a trickle of customers to make it profitable, which in turn means we have
to spend more on marketing. So what should be about $60k worth of annual fees
for us turns into about $200k per year to pay the fees and draw the customers
to make it worthwhile.

There are...cheaper ways to start, but they hazard our safety and put us at
greater risk. E.g. starting in a country where we can do this without a
license. Or starting with cheaper hardware. Unfortunately, that's the nut of
what we'd be talking about, to speak of investing in our customers and only
spending enough to achieve profitability. (In theory, we could spend a few
thousand and achieve profitability, but it wouldn't scale).

Anyway, thanks for the ideas and input... it's the first truly positive view
of loans I've heard as an option against VC, and it's something to think
about.

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guptaneil
I think the biggest advantage of getting VC backing is having an advisor that
has a vested interest in seeing you succeed. Additionally, if this is your
first startup, it can give you a lot of much-needed credibility when
approaching potential clients/customers/employees.

~~~
trussi
There are lots of other ways to get good advice besides raising VC money.

I'd even argue that VC investors are generally too biased towards huge growth
that they will push you in a direction that doesn't necessary align with your
goals, but it aligns with their goals.

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petervandijck
You have to pay a loan back if you fail.

You don't have to pay VC's back if you fail.

Assuming your company makes 150% return the second year and it stays
profitable, there's no reason at all to take VC, it's better to take a loan.
But you don't know that.

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benologist
Most startups fail, and depending on the state of your startup banks might
laugh at you.

~~~
trussi
Look for local city/county business development loans. They generally have a
requirement that 'you get turned down by a traditional lender'. Damn near
anybody can qualify for that one!

The key with most of the local BD loans is they are looking for local job
growth. Get some local insider advice on how to structure your application,
play up how many local jobs you'll create and it's actually pretty easy to
snag some cheap money.

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damoncali
I think you'll find it extremely difficult to get a loan for a startup without
putting up an equal amount of cash as collateral.

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amorphid
Cash flow is most important. If you need money to grow and are paying down
your loan instead, that is bad.

