Costs of Capital

In business school, you learn about two costs of capital:  First there is the cost of debt, which is a function of interest rate and principal and time.  Additionally, there is the cost of equity, which is a function of the opportunity cost of capital, or what you could earn investing the capital somewhere else (side note, there is a theoretical problem with the concept of cost of equity being opportunity cost of capital from the investee's perspective - that only works from the investor's perspective. That is another article).  Next there is the weighted average cost of capital which is a way to average the two and create a hurdle rate for your projects, that you should exceed if you want to be profitable.

Capital in business is actually slightly more nuanced than that.

You can raise capital in other ways - for example, through revenues and profits.  Tesla raised about $400,000,000 by collecting $1,000 deposits from customers toward the yet-to-be-produced Model 3.  That is neither debt nor equity - instead Tesla is borrowing revenue from its customers with the promise to deliver them value in the future.  Tesla's cost of capital is high in this regard in terms of implied promises to its creditor-customers, but that won't appear in any WACC calculation.  If Tesla is able to deliver, the strategy will pay off.  If it is not it could be disastrous for its goodwill and economic moat.

Amazon borrows from its suppliers by delaying their payments.  Amazon is able to do this because it is a large and powerful platform.

There is also the marginal cost of increasing revenues, which is a test of the stickiness of your product.  How much marketing does it take to produce 1% revenue growth?  10%?  20%?  If little or no marketing spend is required to grow your revenues at a profitable level, and the business model is not easily copied, that is the sign of an excellent business worth investing in.  (Note - sometimes that is just a sign of a novel business or business model which is not necessarily worth investing in. Think Groupon.)

Cost of revenues can also be in the form of declining prices and declining margins.  Will lowering your price 10% result in a revenue increase of more than 10%?  If it will, you likely sell a product with elastic demand and you may not be in a good business with strong long-term economics.  For example, an airline could dramatically increase its revenues by dropping its prices, but not at a profitable level.

Finally, the worst way to raise capital is through borrowing from your loyal customers, but many businesses do this.  BlackBerry is an example.  Each of their last 7 or 8 product launches has been released at a very high price point to a dwindling number of core fans.  BlackBerry makes steep marginal profits on their original products sold to those core fans.  Unfortunately, there is little demand outside of the loyalists, so the phone or tablet must quickly see steep discounts in order to maintain revenues.  Essentially, what BlackBerry is doing with this strategy is borrowing from its customers, with their loyalty as security for the loan.  BlackBerry is saying, you have to pay us full price to get your phone when it comes out, but if you had waited two months you could have gotten it for $200-$300 less.  That extra $200-300 that BlackBerry is collecting from its loyalists is no different than a short-term loan, which the customers pay to BlackBerry in hopes that its product will be good quality and have high demand.  When BlackBerry was unable to repay those loans in the form of sustained product popularity in 2011-2015, it faced dire consequences because the loyalty that was "security" for those customer loans began to disappear.  It would have been better for the company to reward its loyal customers by starting prices lower rather than higher, even though that would have had an immediate negative effect on its bottom line.