How start-up and scale-up founders are using non-dilutive capital: Five key use cases

October 14, 2022
How start-up and scale-up founders are using non-dilutive capital: Five key use cases

Savvy founders raise capital from multiple sources and in various forms, not purely equity-based investment from venture capitalists. 

This is particularly common in economic environments where venture capital is less readily accessible and valuations are low.

Non-dilutive capital is one of these alternatives. Often in the form of venture debt, revenue-based finance or recurring revenue finance, capital is provided on the basis of it being paid back over time, as opposed to selling a part of the company to investors.

As a result, it helps founders maintain control and ownership in their company and lower their overall cost of capital. With the right provider it can speed up a capital raise too.

But with non-dilutive capital currently only 2-4% of the Aussie VC market, compared with ~15-20% (and growing) overseas1, there are fewer local examples demonstrating how others have used it. 

That’s why we’re writing this article, which explores five key use cases for start-up and scale-up founders to use non-dilutive capital in their fundraising strategy.


1. Extend runway

The first, and perhaps most common use, is to top up a company’s cash balance to extend the amount of time until their next equity round.

This is equivalent to a ‘bridge round’, where a smaller amount of capital is taken on in between larger rounds, but without the hassle of finding the right investors and agreeing on a new valuation.

The point of extending runway is to ensure certain milestones are hit and the company is in its best position come the next big equity round.

For Series A-D companies, this might be to continue growing and improve revenue run-rates, helping to optimise the next valuation.

For pre-IPO companies, reaching profitability or closing key clients before listing on an exchange might be the goal. In this case, giving up a bit more of the company by selling equity so close to exit just doesn’t make sense, so non-dilutive capital provides an apt alternative.

Contrary to popular belief, topping up or bridging with non-dilutive capital isn’t reserved for companies running out of runway. In fact, taking on non-dilutive capital when in a position of strength can lead to the best terms and is just good old-fashioned proactive.


2. Accelerate growth

Increasing or maintaining spend on initiatives that have a predictable effect on growth is another favourite.

Sales and marketing spend are two of the most common types of these initiatives, because founders often know the return on investment and how long it takes to see results.

Although in times when cash flow is constrained, growth-related initiatives like sales and marketing are typically the first that founders cut back on. However doing so does not come without risk.

When prospective customers are won by competitors, acquiring them in the future becomes much harder and more expensive. And in uncertain economic times, land-grabs are made by those that are cashed up, leaving others in their trail. 

To navigate this and secure market share, founders free themselves from constrained cash flow by bringing on additional funds quickly; and non-dilutive capital provides the means. It also give founders the option to reconsider selling more of the company to investors once greater market penetration has been achieved and built in to their valuation.


3. Top-up an equity round

More and more founders are raising non-dilutive capital alongside or shortly after raising equity capital.

They do this to reduce dilution for all existing and new shareholders (including their VCs), as less new shares are issued.

A typical example is shareholders of a Series A company raising $5m on a $20m pre-money valuation, who will lose 20% if raised solely with equity capital. By raising only $4m in equity and $1m in non-dilutive capital, dilution would reduce to ~16.7%.

If raising equity and non-dilutive capital in parallel, founders can also cut down the time they spend raising, as they don’t have to continue to look for and pitch more equity investors to fill the whole round or to increase its size.

If raising non-dilutive capital just after an equity round, they’re able to leverage their strong cash balance and lengthy runway to grant them access to more non-dilutive capital at the lowest cost.


4. Fund an acquisition

Founders have also been drawing on non-dilutive capital to fund acquisitions – either in part or whole, or to pay for the associated costs.

Acquisitions often require more cash than is in a start-up or scale-up’s bank account, so founders turn to investors and lenders to finance the deal. Although, with acquisition opportunities coming and going quickly, speed is critical.

As providers of non-dilutive capital typically have a more objective decision making process, this can simplify and speed up the fundraise. Where there’s a technology-driven provider, mostly for recurring revenue finance or revenue-based finance, it happens in a matter of days.

The target company’s earnings potential may be considered too, in some cases allowing for more favourable terms on the funds.

And, some founders choose to use non-dilutive capital as an interim source of capital, simply to secure the deal, then refinance with equity capital later. Some intend to do this from the start, others enjoy the flexibility and make the decision later on.


5. Defer payments on a large expense

Founders are also using non-dilutive capital to pay for large expenses.

While waiting on incoming receivables, large expenses can choke a company’s cash flow. This is commonly caused by expenses like product orders, legal engagements or the integration of a new key technology, like aCRM.

This problem exists for all types of businesses, but start-ups and scale-ups, which often don’t have the luxury of a cushioned cash balance, are particularly susceptible.

By funding such expenses with non-dilutive capital, founders are, in effect, creating a ‘buy now, pay later’ solution for themselves. In doing this, they spread out the cost over time and free up cash to keep the rest of the business firing on all cylinders.

What’s more, they’re able to do this without going to the trouble of re-valuing the business and bringing in new long-term investors to drive a relatively short initiative.



Hopefully this shed light on some of the ways founders are using non-dilutive capital today.

If you’re a start-up or scale-up founder thinking about raising capital, consider how you too might include it to diversify and improve your fundraising strategy. 

Kashcade is a technology-enabled provider of Recurring Revenue Finance – a type of non-dilutive capital based on a company’s recurring, or highly predictable, revenues. 

If you, your CFO or advisor is interested in learning more, check out our FAQs page and reach out to the team today!



1Source: OneVentures Venture Credit inAustralia 2022



This article is for informational purposes only, is general in nature and does not consider your specific situation. It is not, and should not be relied upon, for financial, tax, legal or investment advice.