The Case to Finance Your Product Design and Development
Ryan Frederick | August 7th, 2023 | Dublin, OH
As venture capital gets harder to raise, especially for early-stage companies, product financing becomes an even more important option for founders and their startups.
Product financing is a form of venture debt that is specifically focused on facilitating a startup getting a product created when they don’t have the capital to pay for all of the work while it is happening, but it also has other benefits that aren’t immediately obvious that include:
- Increased product velocity — Limited teams can only accomplish so much quickly. Companies that are capital-constrained will likely be team capacity and capability negatively impacting the volume and pace of work on a product. Financing product work help companies get to a commercially viable product sooner, which means getting to product market fit faster and generating revenue/profit faster.
- Raise less capital — Financing product design and development means a company can choose to raise less capital. Raising less capital frees founders to focus on the problem, customers, marketing, sales, etc., and spend less time fundraising. Time and speed are the two most important commodities for founders; having more operational focus helps companies succeed faster.
- Deploy capital differently — Investment monies raised typically have to spread across all operating areas of a company. By financing product work, companies can allot more investment to operations, marketing, sales, and support increasing the effectiveness of these areas.
- Increased runway — Companies gain more runway by financing product design and development. More financial runway, more product market fit runway, more runway across the board. Given that most new products are not going to hit the mark of customer value out of the gate, having more runway is of significant value as a company has to pivot with the product, marketing, and maybe even the overall business model.
- Retain equity — In the case of products being created created by founders of a startup, founders get to retain more equity by raising less equity-based venture capital. Founders who can create a commercially viable product and company by retaining more equity can set the terms of future capital investment if necessary. I have never met a founder that didn’t benefit from retaining more equity in their company and financing product work helps to facilitate it.
- Bootstrapping is more viable — For those founders who are bootstrapping their products and companies, product financing makes it easier. Most founders won’t raise investment and will be forced to bootstrap, making product financing a greater imperative and option.
- Predictable product spend — Product creation financing provides consistent and predictable spend for companies turning what otherwise might be considered a capital expense into an operating expense. Predictability financially and otherwise is hard to come by and product financing brings it.
I reference product design and development above, but I would remiss to leave out product management, devops, quality assurance and other aspects of creating a product that are important. Another benefit to financing product work is that a company can get access to en entire team of product craftspeople that are play crucial roles in creating a product that they otherwise might not have the funds and capacity to have contributing.
Product financing isn’t for everyone and companies with deep financial resources can fund product production as needed, when needed. But for companies who need more financial and operational capacity, product financing can provide significant value.