Venture debt has grown in popularity over the last decade. Typically used by early and growth-stage companies, venture debt provides minimally dilutive growth capital that allows founders to keep control of their company. Structured as a senior secured loan, there is a principal amount and fixed monthly interest payments. Industry interest rates are typically around 10-18% with terms that can last up to three years. Venture debt has a wide range of uses, which include extending cash runway, bridging a company to profitability, or funding large capital expenditures such as an acquisition.
In this article, we discuss three types of documents you need to prepare when applying for venture debt and what lenders look for. These documents include the company pitch deck, historical financial statements, and the pro forma model.
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:
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.
For examples of successful company pitch decks and articles of other tips, click the image below to be redirected to our resource on Investor Presentations.
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.
There are three major pro forma 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).
Tip: Bench’s Guide to Creating Pro Forma Statements
In conclusion, the documents you provide to venture debt lenders during the initial stage of conversations will give them a better idea of the quality of your company prior to diving into deeper due diligence. The pitch deck should convey a strong value proposition with proven traction with a strong team to execute on forecasted growth.
