One of the challenges of raising capital is being in tune with both private and public market dynamics. If the public markets are frothy and money is easy, then private capital is probably cheap and equity is easily raised. If you've just had the worst recession since the Great Depression, then the climate is obviously different. Credit is tight, lending standards are onerous, and investors have the upper hand. For investors willing to shoulder risk, they require very favorable terms. Those who are more risk averse may only want to purchase notes and invest in debt that is secured. After all, they can earn strong rates of return and stay relatively liquid with security.
As I've mentioned in previous posts, you've got to give something to get something. If you sell equity in your company then you are essentially borrowing money and in return paying with equity in your company. If you sell debt in your company then you are essentially borrowing money and in return paying with interest.
Sometimes entrepreneurs are out of touch with markets and it shows. Other times they just don't realize that in order to raise capital you must demonstrate to an investor that you will do everything you can to ensure success and that investors receive a return.
Every entrepreneur I meet claims that he/she is 100% confident in the success of his company and that it will not fail. One easy way to determine whether an entrepreneur is committed to his enterprise is to offer debt that is personally secured by the entrepreneur. If you are so sure that this startup capital will generate returns, are you willing to secure it with personal assets?
The best answer you can receive from an entrepreneur is - "Yes. But I want you to know that I have already put all of my assets into the company and have nothing left." This is the entrepreneur that will do whatever it takes.
When the answer you receive is "No", then the obvious response is "How can you be so confident in your company and expect to return capital to investors if you are not willing to take a secured loan?"
Granted, this scenario is more appropriate for a cash-flowing startup that is looking for expansion capital than for an early stage venture. But the point is that debt is more expensive than equity - how bad do you want capital? Would you rather keep spinning your wheels with your current capital structure or pay for capital to accelerate the development of your business?