Venture Debt
Fund Growth While Minimizing Equity Dilution
What is Venture Debt?
Venture debt financing is a type of financing often used by early-stage companies that are looking to raise capital but do not yet have a proven track record of generating revenue. Also known as venture lending, venture debt is a form of minimally dilutive debt financing used by high-growth companies.
Unlike traditional forms of debt financing, venture debt is typically provided by specialized lenders who are willing to take on a higher level of risk in exchange for the potential of higher returns.
This type of debt financing is typically used as a complementary method alongside equity financing. While the exact structure of a venture debt loan can vary, it is typically structured as a term loan with interest payments and warrants.
When to Raise Venture Debt?
A general rule of thumb when raising debt is to raise it when you don’t need it.
Venture debt is often raised alongside or soon after an equity round. Although some lenders provide venture debt to non-venture-backed companies, creditworthiness and bargaining power are generally highest immediately after closing a round of equity. During this period, verifying a company’s valuation is also easier since the venture capital investors had just completed considerable due diligence with the most updated corporate information available.
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When Not to Raise Venture Debt
If You Can’t Repay.
If you don’t think your company can repay the interest payments, you should not raise venture debt. Signs your company may not be ready also include:
- Performing poorly
- Lacking momentum
- Has a high burn rate
- Has a highly variable revenue stream
- Has less than six months of cash, or
- Is considering debt as a last resort for funding
You should only raise venture debt if you know your company has sufficient cash flow to service the debt or if you are confident you can raise another round of equity in the future to repay the loan.
If the Terms or Covenants are Too Heavy.
Before agreeing to a venture debt loan, you should have someone on your team model the cost of the debt and understand the impact of any covenants on the company. From there, you can get a sense of the company’s financial position if it were to raise a round of venture debt.
If Your Investors are not Supportive.
Although venture debt is a great option for venture capital investors to use within their portfolio companies to reduce dilution, you should avoid raising it if you do not have the approval of your existing investors or board.
Benefits of Venture Debt
Venture Debt can Reduce the Average Cost of Capital.
The first benefit is venture debt can reduce the average cost of capital by offering minimally dilutive funding to rapidly scaling companies. This is especially true when raising venture debt alongside an equity round since equity is the most expensive form of growth capital due to its highly dilutive nature.
Provides Flexibility.
The second benefit is venture debt provides flexibility. Not only does venture debt not require board seats, but the loan itself can be used as a cash cushion in case the company experiences any hiccups along the way. This is a material difference from senior-secured lending, for example, which typically requires that a specific underlying asset is financed. and pledged as a security and/or requires personal guarantees.
The Fundraising Process We Follow
3 Documents You Need to Apply
1. Nailing the Pitch Deck
Pitch decks are used to tell the story of the company and should leave the investor or lender with a lasting impression. The key to nailing the pitch deck is focusing on two things:
1. The Story
2. How You Present
Firstly, the slides should act as chapters that weave together into a narrative that shows the audience how you are going to continue to grow your company. Arranging facts and data will help sell this vision. Since venture debt lenders focus on post-revenue companies, you will want to emphasize post-product-market fit. Focus on your Company’s traction. How are you getting that traction? How are you going to keep growing that traction?
Lastly, it is important to include your plans on how you will use the capital so lenders are fully aware of how their money is going to be used to grow the business.
2. Historical Financial Statements
Venture debt lenders will play close attention to historical financial performance. Therefore, you will need to provide an Income Statement, Balance Sheet, and Cash Flow Statement. Clean financial statements will go a long way as it provides insight into your company’s operations and level of professionalism. Lenders will be looking for positive unit economics and if your company is close to or at operating profitability.
Tip: Lenders will prefer to have these documents sent in Excel format with period division by years and quarters.
2. Pro Forma Model
There are three major pro forma statements:
1. Income Statements
2. Balance Sheets
3. Cash Flow Statements
The pro forma statements show the venture debt lender how the company will use their money to sustainably grow their business, while also showcasing that the company is planning for the future (i.e. best, worst, most likely case scenarios) and anticipating any changes that may affect the business as it grows (e.g. entering a new tax bracket).
How We Offer
Angels
HNIs
Venture Capitals
Financial Institutions
We Look For
Capital Destined to spur Growth
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