Venture Debt
Venture debt in detail
The debt is often obtained at the same time or shortly after an equity round (or multiple equity rounds) and can be used in a variety of ways – discussed and agreed in advance with the Lender. The facility can be structured with an interest-only period, however, as with other borrowing facilities, Venture debt needs to be repaid over a defined period of time.
Venture debt is a typically lower cost means of financing performance growth², investing in research and development, purchasing capital equipment and inventory, providing a ‘cushion’ for unforeseen funding needs and operational requirements, or customer acquisition costs through sales and marketing expenses. Note that we (or any Lender) may take a Warrant in the structuring of the debt. See below for a description of Warrants.
Overview
- Secured financing: Venture debt can be secured against the company’s assets, providing us with a level of security while offering you access to essential financing to grow your business.
- Aligned repayment terms: With flexible repayment structures (such as an initial interest-only period), venture debt allows you to manage your cash flows more effectively as your business grows and scales.
- Equity upside potential: We may receive Equity Warrants, which effectively grants us, the Lender, the option (but not the obligation) to purchase equity in your business in the future, which allows us to share in your company’s success (without requiring immediate ownership dilution).
- Cost-effective capital solution: Often complementing equity financing, venture debt can provide a less-dilutive form of financing alternative, allowing you to retain more ownership while still securing the necessary funds for running operations and growing your business.
Key features
- Security: Typically structured with security taken over all assets (including Intellectual Property).
- Terms are aligned to the growth trajectory of your business, but are typically structured between 36 – 48 months (with a maximum of 60 months.
- Interest-only payment period: Typically, facilities are structured with an introductory period where only interest is repaid. Capital repayments are made only when the ‘amortisation’ period kicks in, at which point both capital and interest repayments are made. Typically, the interest-only payment period would range from 6 to 18 months, followed by the amortisation period which runs until the end of the term.
- Warrant: Lender receives the right, but not the obligation, to purchase equity at a future date*. Note that granting a warrant will dilute ownership when exercised.
*All debts need to be repaid and any security is at risk if not repaid in line with the agreed terms.
Key benefits
- Flexible: Typically structured without onerous financial covenants with which you need to comply.
- Complementary: While venture debt should not replace venture capital investment, when used alongside equity financing, venture debt can allow firms to raise capital while reducing dilution for founders or shareholders.
- Cost efficient: These facilities are typically a less-dilutive form of capital when compared to an equity raise. Whilst there will typically be a requirement for the borrower to provide the Lender with a Warrant as part of the transaction, this will likely mean the borrower is giving away a smaller portion of ownership than if they raised the same amount of capital through an equity raise. This can be a more capital-efficient way of funding operations, cash runway or working capital.
Who is venture debt appropriate for?
Venture debt is typically available to venture capital-backed businesses - whether early-stage companies or more mature companies that are actively choosing to focus on high growth over profit.
That means it’s not an option for bootstrapped businesses who could consider traditional debt options such as cashflow-based term loans or asset-based lines of credit (if they have positive cash flow).