Many young entrepreneurs feel safe with the thought of Venture Capital; however, many founders are unfocused concerning its loan-based relative, venture debt. For some start-ups, Venture Debt is often a solid choice to boost their income and strengthen their VC round with little dilution to their remaining equity. However, there are trade-offs, that you must educate yourself on the fundamentals.
Venture Debt Defined
Venture debt refers to a loan that financial institutions contribute to venture-backed early-stage companies. This type of loan can be a great way to kick start the growth of a start-up. Not only can the financing be used for working capital but also for purchasing inventory and equipment or as a bridge financing round.
The 1970s and 1980s saw the advancing of the high-level venture industry, as introducing venture firms, for instance, Sequoia Capital and Kleiner Perkins set up accounts and experience over different resources, and fruitful new organizations like Apple, Genentech, and Sun Microsystems showed the capability of adventure provides.
The entire venture industry was consuming capital at a terrific rate, and while limited partner (LP) funding to VC’s would later evolve (topping at $104 billion of each 2000), in 1985 limited partner contributions were only $3.8 billion.
In this business environment, individuals and theorists explored for elective sorts of financing and looked to the front-line gear leasing industry as a kind of financing that could help satisfy the necessities of new organizations when the impressive capital venture was required.
When Should You Look for Venture Debt?
Venture Debt can leverage the equity raised by a start-up, cutting the costs of money required to finance a startup, when it is spending more cash than it makes, and because of this debt is more affordable than equity.
Venture debt is typically used for:
- Stalled / delayed fundraising
- Unforeseen financial issues
- Bridge funding
- Asset funding
When TO Look for Venture Debt
- You are growing but equity will take too long to raise, or it is too costly
- Your startup is making predictable and recurring revenue
- Cash flow is near breaking even
- You have raised equity from an institutional investor and is viewing debt as a feasible solution to boost the coffers / scale business
When NOT to go in for Venture Debt
- Revenue is hindered or declining
- The company is amid a business model shift or pivot
- The startup wants to use the debt as a last resort for capital when it has limited cash reserves
- The business lacks momentum
- The purpose of the debt is to fund your start-up’s losses until it can raise new capital
Debt should be managed to invest in areas that accelerate revenue growth.