Venture debt is a flexible form of financing specifically designed for high-growth companies. While it has been around for decades, its popularity amongst founders and entrepreneurs is just starting to take off as they learn more about this financing structure.
Fundraising can be a headache for startups, particularly those that are too risky for bank debt or those that want to minimize equity dilution. This means finding out which financing structure can be tricky.
If you are wondering whether your company could benefit from venture debt financing, we’ve got you covered. Here are the industries that benefit the most from venture debt.
Venture debt is a form of debt raised by high-growth companies that have an established value proposition, are experiencing revenue traction, and have a clear path to profitability. While it is typically given to venture-backed companies by venture arms of banks or non-bank lenders to fund capital expenses or growth initiatives, there are companies – like Flow Capital – that offer venture debt to companies that are either non-VC or VC-sponsored.
This form of debt typically consists of a senior secured term loan combined with a small percentage of equity warrants (only coming out to 0.5-4% in equity).
Compared to bank debt, venture debt is much more flexible with access to larger investment sizes and no personal guarantees.
Compared to venture capital, venture debt is much cheaper since it is a debt product and does not take significant portions of equity ownership.
Venture debt can give startups the much-needed breathing space they need while they chase profitability.
As such, it can provide many great benefits:
Check out our Founder’s Guide to Venture Debt for more benefits.
It’s not just high-growth companies that can benefit from venture debt; it can be a great way for venture capital investors to boost the performance of their portfolio companies following an equity raise.
Here are a few of the benefits venture debt brings to investors:
Venture debt can be useful to high-growth companies that find themselves in a number of different situations. The “right time” to raise venture debt will vary from business to business, and will ultimately depend on your assets and how quickly you’re able to grow.
As a general rule, you can raise venture debt when:
This chart from Statista shows the value of venture capital investment in the US during the first quarter of 2021 by industry. As you can see, at the top of the list of internet-based businesses, healthcare companies, mobile and telecommunication brands, and software companies.
These four industries have three things in common. Rather than filtering them by the actual products they sell and the people they serve, it’s better to define the best industries for venture debt by their characteristics.
These include:
Getting venture capital can be a time-consuming process. Swimming in an incredibly fast-paced industry means tech companies often don’t have the time to do this. In order to stand out and stay ahead, they need to remain on-trend at all times.
On top of this, tech-enabled businesses often don’t have any hard assets or collateral that can be used to get a traditional term loan. This is why industries like software and telecommunications have received the most venture debt over the past year.
Venture debt is perfect for revenue-generating companies with strong cash flows. This is because it allows high-growth companies to purchase equipment or fund growth initiatives during a growth phase without having to raise a bridge round.
If used correctly, venture debt can accelerate a company’s growth at a limited cost to the business. Healthcare appears second on the list of top venture debt industries because it has had to evolve incredibly quickly over the past year, making it a high-growth opportunity for brands in the arena.
Recession-resistant industries are set up to stand the test of time. They have longevity and are pretty untouchable under even the most negative circumstances.
Venture debt helps these types of companies have more cash in the bank without having to dilute too much. With this extra money in the bank, the negotiating power instantly increases so that brands can secure more funding in the future.
If you own a high-growth company and are looking for financing options that are beneficial for you and your business, venture debt might be the perfect option. Not only does it provide a cash extension until further bridging rounds, but it’s also possible to acquire even if you have not raised venture capital.
See how this is possible with Flow Capital and apply for venture debt today.
