The Most Misunderstood Word in Finance is Leverage
Leverage Isn’t the Villain. Poor Capital Allocation Is.
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There’s a special kind of side-eye that gets thrown around when someone combines the phrases “leverage” and “private equity.”
In my experience, it’s a similar look to when you combine “children’s birthday party” with “lawn darts.”
To some, it’s shorthand for slashing costs and maxing out debt to juice IRR. The “Dark Arts” of finance.
But the more I’ve sat with seasoned CFOs inside the PE ecosystem, the more I realize: most people are playing checkers while PE is quietly playing capital structure chess.
I was recently speaking with Mohit Daswani on the podcast, CFO at Simple Practice, former CFO at Thoughtspot, and former Payments CFO at PayPal. We were talking about how leverage gets weaponized in the narrative, but often misunderstood in the math.
“Leverage isn’t bad. Debt, when used responsibly, is a cheaper form of capital. It’s about building an efficient cap table, not burdening a business.”
Let’s break that down.
Leverage Isn’t the Villain. Poor Capital Allocation Is.
If you buy a company for $100M and fund it with $100M in equity, you need to double the business to deliver a 2x return.
But if you use $50M in debt and $50M in equity, and the same company sells for $200M, that’s a 4x return for equity holders.
Same business. Same operational performance. Just a better cap structure.
And that upside doesn’t just line LP pockets. It benefits the management team too. PE-backed execs hold real equity. When leverage is used intelligently, it amplifies everyone’s upside.
It also forces something else: discipline. When interest payments are due each quarter (rents due!), cash management becomes real. Budgeting sharpens. Investments need to clear a higher bar. No more hobby projects or four-quarter science experiments. You either drive results or you don’t.
If you’ve ever had to service debt before, you realize how much better your forecasting gets. It’s like there was a “before debt” level of accuracy, and a hyper-focused “after debt” view that is just so much closer to the pin.
Debt also has a funny way of accelerating financial maturity. As Catherine Jhung from Hercules Capital points out, venture debt forces companies to actually build their long term FP&A muscle. “You need to be able to forecast 18, 24 months out,” she said. “You need to talk through a business model.” Taking on debt isn’t just about repayment—it’s about operating at a higher level of financial rigor over short, medium, and long term time horizons. Equity only run teams are typically good at one of these views (e.g., medium term prediction), but not all three.
I was speaking to another CFO recently who viewed his debt covenants as more of a partner in crime than an inconvenience. He said, “It’s much easier to tell the management team we can’t go and do science project XYZ because we have to show a certain level of profitability to fulfill our debt covenants, rather than straight up saying they have a bad idea.” Debt covenants were the “bad guy” foil he needed to play good cop and maintain a sense of impartiality with his team.
A CFO’s POV: Capital Efficiency Over Ego
Let’s say you’re a CFO being offered two options:
A. Raise $100M in growth equity and run unlevered
B. Raise $50M in equity and $50M in debt at 9% cost
If your business is generating $15–20M in EBITDA and can service the debt, Option B is more accretive. You retain more ownership, minimize dilution, and maintain control.
Option A might feel safer. It def sounds better in press releases. It may even earn you a TechCrunch mention. But it’s not always the smarter path.
For an investor who isn’t on your cap table, it’s in their best interest to lean into the “success” narrative that comes with announcing a big funding (read: dilution) round.
In fact, raising more money when you could make smarter capital allocation decisions might be the greatest lie the devil ever told. Of course the person whose job it is to sell you capital wants you to take more of it. That’s why dilutive capital is louder. Debt, when used responsibly, is quieter but often far smarter.
“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
-Upton Sinclair, growth stage SaaS investor
Leverage as a Negotiation Weapon
And here’s something founders often miss: debt can actually help you negotiate a better equity deal.
Whoah! Counterintuitive, right?
Catherine Jhung, Managing Director at Hercules Capital, nailed it on the podcast:
“Venture debt is actually a fantastic tool to negotiate higher equity valuations.”
It’s a subtle shift in thinking. Instead of letting VCs set the terms unchallenged, taking on debt can give you more leverage—literally and figuratively—at the negotiating table. You’re signaling capital discipline. You’re preserving equity for when it counts. And you’re giving yourself optionality, not dependency.
Leverage isn’t just about balance sheet mechanics. It’s a message: we don’t need your capital, but we’re open to it on the right terms.
Don’t Strap a Rocket to a Tricycle
OK, now that I’ve got you a first class seat to leverage town, I’d be remise to point out something important: it’s not for everyone
As Catherine explained:
“You shouldn’t take on venture debt if you don’t have product-market fit or a plan to repay it.”
Seems obvious, right? Apparently not. Some folks hear “cheaper capital” and think it’s a free pass to skip the hard part—like building a real business.
Here’s the thing: leverage isn’t a growth hack. It won’t magically fix a shaky go-to-market motion or retroactively install a customer base. If you're still chasing PMF, debt isn’t a tool. It’s a trap.
You can’t just strap a rocket to a tricycle and call it a go-to-market strategy.
The Real Power of Leverage
Used properly, leverage lets you:
Reduce your weighted average cost of capital
Minimize dilution
Increase returns across the equity stack
Impose helpful constraints that sharpen execution
Signal maturity to future buyers or sponsors
It’s not magic. It’s math. And it only works if you’ve got the fundamentals: strong cash flow, reliable gross margins, and a tight handle on expenses.
Final Thought
Private equity isn’t going away. It’s becoming the default path for a wide range of companies, especially those that are past product-market fit, generating cash, and thinking more about value creation than hype.
And neither is leverage. Hell, it’s older than time. We read about it back in middle school in The Merchant of Venice.
If your strategy can’t support leverage, maybe it’s not the strategy that’s broken. Maybe it’s the business.
Leverage isn’t risky. Misunderstanding leverage is.