Capital is not one decision
Founders often treat funding as the same choice repeated over time. Which investor, which round, which valuation. Framing it that way hides a more useful idea. Capital is not one decision made repeatedly. It is a structure built over time, and the strongest software companies think about it as a stack rather than a sequence of identical raises.
A capital stack is simply the combination of funding sources a business uses, each chosen for the specific purpose it serves. Equity, venture debt and revenue-based financing are not competitors to be ranked once and for all. They are different tools, and the skill lies in matching each one to the part of the journey it suits. This guide sets out how the pieces fit together.
What each instrument is genuinely good at
Equity is the right tool for funding genuine uncertainty. When a company is doing something unproven, entering a market that may not exist yet, or spending years before it can support itself, equity investors share that risk in exchange for ownership and upside. That is a fair exchange for the earliest and riskiest stretch of a company’s life, and there is no good substitute for it at that stage. Equity is patient in the sense that it does not need to be repaid on a schedule, and it brings investors whose interests are tied to the company’s long-term value.
Venture debt is the right tool for extending runway around an equity story. For a company that is committed to the venture path and expects to keep raising, a debt facility sized alongside the latest equity round can push the business to a higher valuation before the next raise, reducing the dilution of that raise. It depends on the equity ecosystem around the company, which is both its logic and its limitation.
Revenue-based financing is the right tool for funding growth that the business can already substantiate with revenue. Once a software company has real, recurring revenue with strong retention, it can fund the next stage of growth against that revenue without giving up ownership and with less dependence on the next equity round. It is repaid as a share of revenue, capped at an agreed multiple, with covenants and warrants used only selectively, depending on the situation. It suits the specific and increasingly common situation of a company that is efficient enough to have options and would prefer to keep its equity.
How the stack evolves across the journey
These instruments tend to enter at different stages, and the order is not arbitrary.
In the earliest stage, when the business is still proving that it works, equity provides almost all of the funding. There is little recurring revenue to lend against and too much uncertainty for debt to be an appropriate fit. This is equity’s natural territory and trying to avoid it here usually means underfunding real risk.
As the company finds a repeatable model and recurring revenue starts to build, the mix can broaden. A business that has raised equity may add venture debt to extend runway between rounds. A business with genuine recurring revenue and healthy retention can begin to fund growth with revenue-based financing instead of selling more equity, which is often the moment where founders first realise they have a choice they did not have before.
At growth stage, with substantial recurring revenue and improving efficiency, the balance can shift decisively. The proven, revenue-generating parts of the business, such as funding a sales and marketing engine with a known payback, are exactly the parts that non-dilutive capital funds well. Equity can be reserved for genuine bets that still carry real uncertainty, rather than spent on growth the company could fund another way. Using expensive equity to fund predictable growth is one of the most common and costly mistakes at this stage.
A stack in practice
Consider how this plays out for one company over several years. In its early life it raises equity, because it is still proving that its product and market exist, and no other form of capital would be sensible given that level of uncertainty. That equity funds the years before the business can support itself.
Once the company reaches real recurring revenue and begins to grow predictably, it faces its first genuine choice. It could raise another equity round to fund a sales and marketing push with an established or reasonably predictable payback. Instead, it funds that push with revenue-based financing, because the growth is supported by proven revenue, and the business can service the repayments from the revenue it generates. The equity it would have sold stays with the founders and the existing investors.
Later, approaching a larger strategic move whose outcome is genuinely uncertain, the company raises equity again, deliberately, for the part of the plan that carries real risk. The result is a business that used each instrument for the job it was built for. It funded uncertainty with equity and proven growth with non-dilutive capital, and it reached the same place having given away materially less ownership than if it had raised equity for everything.
The common mistake
The most frequent and expensive error is using equity to fund things that are no longer uncertain. Once a growth motion is proven and repeatable, funding it with equity means giving up ownership to pay for something the business could have financed against its own revenue. Recognising the moment when a company graduates from needing equity for everything to having a real choice is one of the most valuable judgments a founder makes.
Matching the instrument to the job
The organising principle is simple. Fund uncertainty with equity, because equity shares risk. Fund proven, revenue-generating growth with non-dilutive capital, because the business has the revenue to service the capital without giving up ownership.
A company that internalises this stops asking merely how much to raise and starts asking what each euro is for. Capital that funds a genuine leap into the unknown is well matched to equity. Capital that funds the scaling of something that already works is badly matched to equity and well matched to revenue-based financing, because the business can service it and keep the upside. The same logic explains why a thoughtful founder might raise equity and use revenue-based financing in the same year, for different purposes, without contradiction.
Building the stack deliberately
The practical takeaway is to design the capital structure on purpose rather than defaulting to an equity round every time capital is needed. Before the next raise, separate the uses of the capital into the parts that fund uncertainty and the parts that fund proven growth. Fund each part with the instrument built for it. The result is usually less dilution, more resilience, and a funding structure that reflects the actual shape of the business rather than habit.
At Round2 Capital, we provide the non-dilutive layer of that stack for recurring-revenue software companies in Europe, and we are comfortable sitting alongside equity and other instruments where each is best suited to its role. Where revenue-based financing genuinely is not the right fit, we can also provide the equity layer ourselves, typically as a minority stake and often as a later step to help prepare a company for its next exit. A well-built capital stack keeps more of the company in the hands of the people who built it, while still funding everything the business needs to grow.
