One of the most widely used cases for venture debt is topping up an equity round to extend cash runway. To begin, a bit of background information on how companies get funded through venture capital. Suppose a new MarTech SaaS company needs $20 million in funding to get from idea to a profitable, self-sustaining company. That $20 million won’t come all at once and won’t come from one VC. Instead, the company will receive funding in stages (Seed, Series A, Series B, Series C). Funding rounds benefit both the VCs and the entrepreneurs. VCs reduce their risk by introducing multiple yes/no and valuation checkpoints, while the entrepreneur reduces dilution by raising successive rounds at higher valuations.
Each funding round is designed to get the business to its next funding round, allowing the company to achieve tangible milestones of development. These milestones are critical because it provides current and new investors with evidence that the company has progressed, is on track, and is less risky than it was at prior rounds of funding.
Funding rounds are typically designed to fund 12 to 24 months of operations based on how much cash the company is forecasted to burn to reach its next milestone. For example, a company burning $250K per month, expected to reach its next milestone in 12 months, will typically be set at $3 million.
What if the company takes 15 or 18 months to get to its milestone?
This is where venture debt comes in. To help extend the cash runway of a business, venture debt can provide companies an extra 3 to 6 months of cushion in case of delays without increasing dilution. The cost of the venture loan would be much lower than adding an extra 6 months of equity to the round.
