Fundraising: How to Use Capital to Grow as a Company

The Sources and Uses of Company Funds

Drew Jackson

Feb 12, 2025

đź‘‹ Hello friends,

Thank you for joining this week's edition of Brainwaves. I'm Drew Jackson, and today we're exploring:

The Sources and Uses of Company Funds

Key Question: How integral is funding to a company’s growth?

Thesis: Funding can complement and even accelerate growth strategies. However, each company has distinct challenges that require different solutions, so the role of funding evolves throughout the lifecycle of the company. Success requires more than just money, however, funding can greatly help smooth out gaps.

Credit Cunningham & Associates

Before we begin: Brainwaves arrives in your inbox every Wednesday, exploring venture capital, economics, space, energy, intellectual property, philosophy, and beyond. I write as a curious explorer rather than an expert, and I value your insights and perspectives on each subject.

Let’s dive in!

The lifecycle of a startup is a complicated journey. On a very basic, vague level, it averages out to something like the following:

Credit Manraj Ubhi

Around 4.7M businesses are founded each year.

Yet, the number of them that make it through this lifecycle is very small. Why?

The main issue: funding.

If you had all of the money in the world, anyone could build a successful company.

Let’s take a step back. There are two scenarios a founder can be in when they’ve founded their company.

1) The company is immediately profitable. In this case, funding isn’t a problem as the company can use its profits to reinvest into the company and promote growth. Congrats! You’ve won the pseudo lottery, and don’t need my insights and assistance.

2) The most common option is that these startup companies are in hyper-growth stages, losing money each month. The only thing getting them through this month and the next is the massive cash reserve these companies have from banks, investors, and other entities to prop up their growth until they achieve profitability.

This article is for those companies.

For simplicity’s sake, let’s assume the profitability of a company over time looks like the above (in normal life it’s more exponential, and the time axis can get complicated).

As you can see, for a period of time after the company is founded while they’re growing, the company is losing money each month. Why?

Initial Startup Costs

Think of local businesses in your community.

What types of costs are needed up-front to start that business?

If we consider someone wishing to start a local bakery in their town, before even opening their doors for the first time, there are many costs that need to be incurred:

Many of those costs are incurred before a dollar of revenue comes in the door.

Who is going to pay for these costs?

That’s a great question and one of the main reasons that precludes people from starting a business.

In this scenario (and in many others), there are 3 main options that exist to fund your startup company:

How many people have enough cash on hand to fully fund their initial startup costs on their own? Very very few.

So, that leaves 2 other options, debt or equity.

The more common option, at least for small businesses, is to take on some form of debt.

You’ve probably heard of people putting up their house as collateral on a loan to fund their new startup. This is an example of debt funding. It may not always be this dramatic, but you do often see people taking out small business loans and/or taking on large amounts of credit card debt (not advised) to fund their startup.

My expertise is not in this area of business loans, so if you are interested in any of this further, please consult your local bank personnel.

Now, if you don’t have enough cash on hand or if you don’t want to take on massive amounts of debt to fund your company, what is the other option?

Usually, the answer is to give some portion of the company equity in return for capital upfront.

For today’s purposes, I’m going to lump this entire process into the term venture capital funding (although there are many types of funding here, visualized in the section below).

Venture capital is a complicated world. Previously I’ve talked about how venture capital takes a large number of bets on volatile companies with the hope that a small number will return large dividends. We’ve looked at how venture capital firms evaluate startups as potential investment opportunities.

No matter what form of funding someone uses for their company, it can be critical to that company’s growth and should be deployed accordingly.

Let’s dive into how companies across their life cycles use funding to grow and solve issues they may be having.

How to Use Capital to Grow as a Company

The goal of almost every company is to grow forever.

Yet, depending on the stage your company is in, growth looks different for each company.

Consider the following chart:

Credit Country Club Bank

In the very early moments of founding a company, you’re in a hyper-growth stage. In venture capital, the goal of these companies is to triple-triple-triple-double-double, meaning you want to go from $100,000 in revenue to $300,000 to $900,000 to $2.7M to $5.4M to $10.8M over the next 5 years.

Yet, as you would imagine (or as you might have experienced), growing at least 100% in the early stages of your company is incredibly difficult.

Or, to use another example, if your company is more mature, having an established product and market space, you’ll probably experience lower growth of 0-20ish%.

Perhaps your company may be experiencing a negative or declining growth phase, potentially on the brink of bankruptcy.

No matter what the stage, funding can be used to grow your company.

Let’s introduce the framework we’ll use to discuss each stage of the company life cycle and how companies use capital to grow in each stage:

  • Stage of Company
  • Example of a Company in This Stage
  • Characteristics of Companies in This Stage
  • Problems Companies Have in This Stage
  • Potential Sources of Funding in This Stage
  • How Funding Can Help Companies Grow In This Stage

The Early Stage

Stage of Company: “Early”, Concept Phase, Ideation, Minimum Viable Product, Founding, Pre-Seed, & Seed

Example of a Company in This Stage: The thousands of startups currently active, companies coming out of university incubators, almost all YCombinator companies, most pre-seed and seed-funded companies.

Characteristics of Companies in This Stage: Companies in this stage exhibit a wide range of characteristics given how early they are and the vast number of industries and business models. It would take libraries to describe all of the characteristics of companies at this stage. Instead, here’s a quick and dirty summary of some of the most common characteristics:

Startups are majorly focused on developing and validating their core business concept, backed by entrepreneurs who possess a strong vision to solve a problem they see in the market. For many, they are deeply passionate about what they’re doing and, as such, are willing to take significant risks.

Products and services during this period are at their very initial stages as companies race to achieve the “minimum viable product”, dedicating significant resources to research, prototyping, marketing, and other product initiatives. Initial tests should demonstrate the product/service creates value for customers.

These startups utilize a small, tight-knit team, usually less than 10 people are tightly focused on doing multiple jobs within the organization. Founders are heavily involved in day-to-day operations—this business is usually their entire life. As the team is so small, startups during this phase are highly flexible and adaptable organizations.

Uncertainty about the future is incredibly high during the initial stages of the company. Long-term viability is the goal, however it's difficult for many to achieve. For better or worse, a large majority of businesses fail at this stage. Success depends on quickly identifying and responding to market signals correctly.

During this stage, companies develop strategies to expand market share, pursuing growth strategies that have the highest chances of success and of attracting future funding. The initial goal is often to demonstrate proof of concept and the potential for larger market penetration.

Problems Companies Have in This Stage: Early-stage companies experience a world of problems and issues, many of which will be ongoing problems as the business grows and matures. Six of these are detailed below:

1. Financial Constraints

2. Market Validation Issues

3. Talent Acquisition and Retention

4. Operational Challenges

5. Competitive Pressures

6. Psychological and Leadership Challenges

Potential Sources of Funding in This Stage: The Founder’s savings, Family, Friends, Angel Investors, Crowdfunding (using Kickstarter, GoFundMe, etc.), Venture Capital, Grants, Subsidies, Incubators, Accelerators, and Bank Loans

How Funding Can Help Companies Grow In This Stage: Funding is critical in the early stage as it can almost immediately determine a company’s failure or success.

Having funds available can help companies develop higher-quality products on a faster timeline. We call this time to market, where companies invent and develop a product and bring it to their customers. The goal of business is to bring the highest quality product to market in the quickest amount of time, and funding is necessary to expedite this process.

The founder can use available funds to acquire key talent that fills critical roles, such as product engineering, sales, marketing, finance, etc. This builds a more experienced, diverse team which creates a larger chance of business success in the long term.

The key to bringing a product to market is understanding where that product fits in the market and how customers will benefit from the product. Funding helps companies quickly bypass much of the trial-and-error stages through targeted market research initiatives, the creation of sales and distribution teams, and identifying an initial customer base more aggressively.

A large difference between established businesses and new startups is technology and process developments. Due to economies of scale, these large enterprises can develop or use technology and tools that are integral to producing their product/service for a lower per-unit cost. Funding can help startups bridge this gap to equal the playing field with legacy incumbents.

As companies are sizing up the market and their competitors, having adequate funding coffers enables faster growth compared to bootstrapped competitors and helps these startups stay ahead of market trends. Many times startups are reactive to market conditions, yet funding can help them be proactive, riding the wave to survive when their competitors are floundering.

Overall, funding helps extend a company’s runway (whether that be days, months, or even years) into the future. It provides a buffer against any unexpected challenges, of which there are many as a startup. It allows many companies to get out of the early stage and onto the growth stage.

The Growth Stage

Stage of Company: Growth, Series A through E Stages, Expansion, “The Middle Stage”, & Establishment

Example of a Company in This Stage: OpenAI, Anthropic, Bluesky, DeepSeek, Temu

Characteristics of Companies in This Stage: Growth stage companies are generally more stable than early-stage startups, with some of the most common characteristics detailed below:

Many companies in this stage have successfully validated their core product/service with their customer base, establishing a clear product-market fit.

From a financial lens, these companies are experiencing consistent and rapid revenue expansion as mainstream consumer groups begin to adopt their product/service.

This leads to an increased market share and the beginnings of brand power.

By this point, the product has majorly been refined (although there are constant improvements being made), and product lines often expand to include other, complementary offerings. Companies focus on creating competitive advantages to draw further adopters to the brand. This could also coincide with expansions into new geographies and customer segments.

With the growth in customers comes a subsequent need to grow in employees and organizational structure increases. Hierarchies of management begin with the establishment of more structured processes and systems. Companies often develop more specialized departments (e.g. HR, marketing, sales). Operations generally become more sophisticated with the introduction and mass adoption of technology and investment in scalable business systems.

Yet, this growth doesn’t come unrestricted. There are often clashes with established players, industry dynamics, and market innovations. Companies need to continuously innovate and differentiate in order to maintain a growing presence in these evolving markets.

This growth and development in the market often bring positive cash flows and attract more significant rounds of investment (discussed in the sections below). Companies generally increase in valuation and many founders begin to explore potential exit strategies (e.g. IPO, acquisition, merger).

Problems Companies Have in This Stage: The growth stage is a period where companies must balance rapid expansion with sustainable development, struggling to maintain the entrepreneurial spirit while building a more structured organization. This transition period comes with many problems, many of which are detailed below:

1. Scaling Challenges

2. Operational Inefficiencies

3. Market Competition

4. Strategic Challenges

5. Customer Long-Term Value

Potential Sources of Funding in This Stage: Venture Capital, Private Equity, Bank Loans, Joint Ventures, Conglomerates, Strategic Partnerships, Company Operating Cash Flow, Family Offices, and Mezzanine Debt

How Funding Can Help Companies Grow In This Stage: Funding in the growth stage is about gaining strategic resources, expertise, and momentum that can transform a business into a market leader. Detailed below are specific ways that funding promotes growth and maturity in companies at this stage:

Funding can help companies expand their size and market penetration. Funding reserves during this stage can help support entering new geographic markets, fund the development of new product lines, and help companies pursue more aggressive market expansions. Companies in this stage can have resources to further scale sales and distribution networks.

Top talent is crucial during this stage, yet it is extremely expensive to acquire. Additional capital can help attract top-tier talent and support competitive compensation packages. Further than this, companies in the growth stage often lack the necessary number of employees to accomplish all that they want to accomplish.

Funding sources can help companies acquire key sources of technology and infrastructure in order to provide the best quality product or service. Often early-stage companies are operating on skeleton systems that only perform the bare minimum. Acquiring the next level of technological capabilities would allow them to grow exponentially, however, it is often quite expensive.

When companies are in the growth phase, generally they’ve achieved some sort of minimum viable product that they are offering to all of their customers. Generally, however, there is only a smaller set of products that are offered. Additional funding could provide more opportunities for research and development of new products and services that could provide more growth opportunities in the future.

Overall, additional funding generally provides growing companies with more financial stability and strategic flexibility. Funding can help extend a company’s runway, providing a buffer against market uncertainties. More aggressive growth strategies can be pursued as there is reduced financial stress on existing operations.

The Maturity Stage

Stage of Company: Mature, IPO, Scaling, “Large”, & Later Stage

Example of a Company in This Stage: Apple, Microsoft, Adobe, Home Depot, Walmart, Target

Characteristics of Companies in This Stage: Mature stage companies are usually very stable, lower growth companies. Some of the most common characteristics are detailed below:

Mature companies often have an established brand reputation, with stable market shares and a predictable customer base. They have a deep understanding of market dynamics and strong relationships with their customers and their suppliers. These companies are often more focused on maintaining their position than pursuing rapid expansion.

As these companies are often larger, they exhibit more stable and predictable revenues and cash flows. This is combined with a more complex, hierarchical organizational structure with well-established departments and divisions.

Product lines are very established, generally with only minor improvements being made over time. The focus is often on product refinement rather than radical innovation. This fuels the competitive strategy, mainly defensive. Price competition becomes more important than new product innovation with an emphasis on retaining their current customer bases.

As a startup and in the early stages, these businesses often took many large risks. Now that they’re mature, there is a much more conservative approach to risk, with strong compliance and governance structures focusing on protecting existing assets. The emphasis is on stability and sustainability, as companies diversify into related markets, reducing their risk profiles.

Problems Companies Have in This Stage: The maturity stage is a period where companies have more stability and predictability, but are more susceptible to a loss of market share, declining profitability, potential entry into the decline stage, and more. This period comes with many potential problems, many of which are detailed below:

1. Innovation Challenges

2. Market Position Threats

3. Organizational Inefficiencies

4. Growth Limitations

5. Strategic Challenges

Potential Sources of Funding in This Stage: IPOs, Bank Loans, Private Equity, Late-Stage Venture Capital, Family Offices, Management Buy-Outs

How Funding Can Help Companies Grow In This Stage: Funding in the maturity stage is about the modernization of resources, further innovation and R&D, market expansion, and enhancing their operations to continue being a market leader. Detailed below are specific ways that funding promotes maturity and dominance in companies at this stage:

Mature companies have been functioning with processes and strategies that are older and unrefined for a larger organization. Additional funding can help companies digitally transform their technology stack, modernizing legacy systems. This can enable major organization restructuring combined with strategic acquisitions or mergers that transform the company into a bigger, more diverse entity.

As companies mature, their products and services also tend to be maturing, so additional funding can be used to invest in emerging technology. Research into new market opportunities can enable the development of disruptive technologies and the creation of innovation labs. Developing new products and services helps continue the company’s legacy in the industry.

Free cash can be used by mature companies to expand their markets domestically and potentially even internationally. This will require new distribution channels that can provide opportunities to acquire competitors and enable vertical integrations along the way. Resources can provide for further market position and repositioning if necessary.

Mature companies require large amounts of infrastructure and advanced technologies. Supply chains need to be optimized. Facilities need to be upgraded and expanded. Additional capital can easily be deployed in most mature businesses to increase their base layer of tech and infrastructure that supports all of their operations.

The Decline Stage

Stage of Company: Restructuring, Bankruptcy, Incumbent, & “The Exit Stage”

Example of a Company in This Stage: Party City, The Container Store, Spirit Airlines, Red Lobster (now recovering), Big Lots

Characteristics of Companies in This Stage: Companies in this stage exhibit a streamlined range of characteristics given how decline generally hits in many different ways, but tends to pile on itself in a similar fashion as it progresses. Here’s a quick summary of some of the most common characteristics:

For declining companies, market shares are often declining, customer bases are weakening, and there is increased pressure from competitors.

Companies struggle to maintain financial performance.

Products stagnate and sometimes even decline in value. Innovation is majorly nonexistent as priorities are elsewhere.

Operations age and often become less efficient. Higher costs combined with reduced economies of scale put pressure on resources.

Key employees leave. Companies downsize and restructure.

It’s difficult for these companies to retain their resources as market conditions and other factors press down on all sides. Disruptions happen often. Stakeholders put pressure on the management team as investor confidence is reduced.

Problems Companies Have in This Stage: Declining companies experience some of the most challenging problems as they continue to shrink and lose market share. Many go bankrupt because of these issues. Five of these key problems are detailed below:

1. Financial Distress

2. Market & Customer Issues

3. Strategic Paralysis

4. Leadership Challenges

5. Stakeholder Relationship Issues

Potential Sources of Funding in This Stage: Bank Loans, Private Credit, the Government, Wealthy Stakeholders, Management Buybacks, Distressed Investors, Restructuring firms

How Funding Can Help Companies Grow In This Stage: Funding can make or break a company during this period. If investors put more money in, it signals confidence and can spur other rebounds. If funding isn’t present, the business almost inevitably goes bankrupt.

Funding can help companies restructure their operations, helping them perform critical reorganizations of their business units.

Almost always, companies need to strategically reposition to avoid bankruptcy. This can enable a pivot into new business models, new markets, and even new products. Rebrands may be in order, strategic acquisitions may need to be made, and resources need to be acquired.

Debt often needs to be restructured and managed. Companies need access to working capital in the interim, providing some financial breathing room.

Often key talent has left the firm for other, brighter opportunities, so new employees need to be hired to fill these gaps. In addition, funding can also help create new retraining programs that can help reset the company culture and promote organizational restructuring.

Funding Can Be A Critical Component of a Company’s Growth

The discussion above is necessary, but incredibly dense and boring. I don’t blame you if you simply skimmed it.

Here’s the meat and potatoes, summarized into 3 concise, yet powerful bullet points:

The common phrase “cash is king” truly applies here (an expression that refers to the value of having cash on hand, especially during times of financial uncertainty).

Whether we like it or not, companies with cash (here meaning funding) tend to succeed more than companies without cash. This doesn’t mean these are the “best” companies or the companies that should succeed, however.

Moral of the story: companies that cannot self-fund need funding to help enable growth strategies.

This is why there are gigantic industries that provide funding to companies during these phases (e.g. Venture Capital ~$280B, Private Equity ~$5T, Private Credit ~$1.7T)

Funding is critical. Especially to growth.

That’s all for today. I’ll be back in your inbox on Saturday with The Saturday Morning Newsletter.

Thanks for reading,

Drew Jackson

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