Also known as venture lending, venture debt is an attractive financing option for early and growth-stage companies. This form of alternative debt generally consists of a term loan lasting up to three years with warrants on company stocks.
Benefits of Venture Debt
An attractive financing option for VC-backed and non-VC-backed companies
When to Raise Venture Debt?
Alongside an Equity Raise
One of the best times to raise venture debt is alongside or immediately following an equity raise. Due diligence materials are in-hand, cash is in the bank, and momentum is strong. Companies can also lower their equity round amount and supplement it with a venture debt loan in order to minimize equity dilution.
Between Equity Rounds
Venture debt can extend cash runway in between equity rounds so the company has more time to achieve its next milestone before the next equity raise. This can also result in a higher equity raise and less equity dilution.
Fund Large Capital Expenditures
When funding large capital expenditures such as buying equipment or acquisitions, venture debt can be used as a less expensive alternative to equity financing.
The Insurance Policy
A venture loan provides an extra cushion in the event that a company needs more time to get to its next milestone. This would eliminate the need for an emergency bridge round or down round. Once the company is back on track, the company can proceed with its next equity round.
Bridge to Profitability
Using debt to propel your company forward during a critical point of growth can eliminate the need for a final round of equity financing.
How It Works
Typical Venture Debt Agreement Structure
Who Should Apply for Venture Debt?
Venture debt is best suited for companies that are revenue-generating.
While venture debt can play a supporting role in early-stage companies who have recently raised an equity round, this form of financing is easier to secure for more established startups that are creditworthy through significant assets or cash flow. While some lenders do accept non-VC-backed companies, lenders do prefer companies that have secured at least one round of venture capital financing.
Open to high-growth companies in other non-tech sectors