Minimum rate of return is only one measure of cost. If we look at cash flows, the story is much different. Startups are usually cash-constrained, and equity financing is a way to raise cash without negatively impacting future prospects. Debt financing causes a drag on a company's cash flows and reduces flexibility, since now the company must divert a portion of its cash flow to interest payments. For a young company with low revenues and no profits, and thus unable to make tax deductions on interest, debt financing is actually a highly unattractive proposition.

Not true. If a startup could access debt but future uncertainty about its cash flows (say between series A and Series B) combined with the cash pay requirements for such cash flow (likely 18%) make the debt vs equity calculation not as straight forward as it seems.