Ask HN: Why is VC better than taking out a loan for my startup?
...assuming the business model will bring in 75% ROI the first year and 150% the second?
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. :)
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.
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.
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.
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.