Economics. Suppose you have a factory and a growing order book but you're running at or near full capacity; if you get any substantial increase in the number of orders, it's going to take longer and longer to fulfill them, and customers might start to go your competitors if they feel the quality of your service has dropped. This is a diseconomy of scale - you've run out of room to grow and the more business you get the lower your margins.
The obvious solution would be to set up another factory. Suppose for simplicity that this costs $25 million and allows a doubling of capacity. suppose further that TeeSpring is making a profit of $100,000 a week (a completely imaginary figure - I know nothing about their finances). Because it's near full capacity that weekly net isn't going to increase much. But saving up the money to purchase the factory outright would take 4-5 years - an organic growth strategy - is plenty of time for competitors to move against you and pull away customers.
So you have a couple of options. You could go into debt, either by getting a loan or issuing a bond that pays interest (effectively the same thing). Now some of your income goes on interest payments, but they're tax-deductible and after you've paid off the debt you'll still have the second factory. As long as the increased income resulting from the investment is greater than the cost of borrowing the capital then going into debt can be perfectly sensible - the same reason it makes good sense for governments to splurge on necessary infrastructure during periods of low interest rates, just like we're not doing now due to politics :-/
Another option is to issue equity, ie sell shares in the company to raise the money. For large firms this may not be any more attractive than debt, because shareholders will expect a dividend of some sort. For growing firms it makes a ton of sense because early investors are not so much interested in dividends as in the possibility for the shares to appreciate in value - who wouldn't have liked to invest $1 million in Google or any other large company back in the early days? This is ideal for a firm like Teespring that has a very simple and straightforward business model - manufacturing a basic consumer product like this is great from an investor's POV because it's so easy to analyze.
Excellent answer- I wonder though why more start ups don't take out loans/issue debt? Is it simply because they can't find anyone willing to lend to them at reasonable interest rates? I would think a company like the one you describe would be a pretty good bet for a lender to give a loan to build a factory.
They do sometimes, but in recent years banks have been more reluctant to lend and issuing bonds typically involves an awful lot of legal overhead, so I think it's just easier to issue equity. Another reason is that if business doesn't go as well as you hope the debt might allow creditors to secure your secured assets/stock, whereas if you issue equity that's not an issue. Also, for early stage companies raising equity can be a good way to meet people you'd want on the board advising on the future direction of the firm.
But you know I just know about this second hand from being into economics. If you search for 'capital formation' you'll find lots of stuff and some people like grellas here at HN are specialists in that.
Thanks again for another great answer. I can see where the legal/regulatory overhead for issuing debt could be a big roadblock. It is my understanding that a lot of early stage financing is 'convertible debt', with the idea to convert it into equity at a later time. I wonder how often start-ups decide to pay off this debt from revenue rather than allowing it to convert? Would that be a big no-no?
Personal loans are a great way to bootstrap a startup and can lead to you having more equity later on. But it can be hard to get a lot of capital this way, compared to raising from investors. It can also be riskier - taking out a $5mil loan from a bank is a bit scarier than raising $5m from venture capitalists who understand that 90% of their investments fail.
They do, and there are companies setup to make those kind of loans but the parameters have to be just right.
Also things like IP, or growth curve, can usually not be used as collateral. You start to need deep analysis of those assets and people willing to bet on them which is where VCs come in.
In the case the OP described above, I would think the factory would be pretty good collateral. For a software company that just wants to hire more staff, not so much :)
My favourite analogy is that a successful business is like a machine that takes money and then, one hour later, spits out 1.2 times whatever amount you put in.
You could start by feeding the machine $1, waiting an hour, then feeding the $1.20 back in, and so on. But you'll get richer far quicker if you persuade somebody to lend you $1M and directly dump that in to the machine.
As others said - grow faster than your current cash allows. You don't want to have scale just to support your current customers but be able to scale to support your future customers.
One example that was mentioned in the article was building a factory. Obviously that requires a huge chunk of capitol but will allow the business to grow to fill the market that they have confirmed to exist.
