Late-stage Internet startups are developing a taste for a different flavor of money: Debt financing. Just like Dropbox, Square has secured a revolving credit facility worth hundreds of millions of dollars.
Square Also Just Got Hundreds of Millions in Credit -- So What’s Up With Debt Financing?
Later-stage Internet startups are developing a taste for a different flavor of money.
The new funding for the payments startup was first reported by CNBC, in a deal led by Goldman Sachs, with Morgan Stanley, J.P. Morgan, Barclays and Silicon Valley Bank participating.
“Securing access to low-cost capital always makes financial sense, even for a well-capitalized company like Square,” said a Square spokesperson, confirming the financing.
Silicon Valley companies more typically take funding from venture capitalists in exchange for part of their company, so everyone’s interests are aligned toward a big exit down the line. Debt financing is a simpler arrangement: You borrow money, and you pay it back.
And it’s not as though Square picked Option B without fully weighing Option A. Over the past five years, the Jack Dorsey-helmed company raised more than $300 million in equity financing from investors, including Khosla Ventures, Sequoia Capital, Kleiner Perkins, Citi Ventures and Rizvi Traverse.
While it’s an interesting coincidence that the Dropbox and Square debt financings happen to line up timing-wise, its practice seems to be increasingly used by tech startups. Prior to these two deals, companies including Facebook, Twitter and Box all raised debt financing before going public.
Some speculate that later-stage companies are getting money when they can, at attractive terms, while avoiding going public.
But you can also see the appeal of debt financing: It’s funding on good terms and it doesn’t dilute the ownership of your company. In addition, you can choose to spend it or not and get to know banks and their bankers, should you ever decide to go public.
This article originally appeared on Recode.net.
