![]() While less impactful than an equity round, venture debt lenders typically require warrants or equity kickers as part of the financing package, which can dilute the ownership stake of the founders and other equity holders. Startups that take on too much debt may be unable to make payments, which can lead to bankruptcy or a forced sale of the company. One of the most significant risks is the potential for default. While venture debt can be a useful financing tool, startups must understand the risks. As a result, startups that are pre-revenue or have uncertain revenue streams may have difficulty obtaining venture debt financing. In addition, the typical venture debt lender focuses on the capacity of existing investors to close one or more follow-on rounds in case the company fails to attract new investors. Lenders will typically look for startups with a strong revenue stream, a clear plan for growth and a strong management team. Venture debt is most appropriate for startups with a clear path to profitability and positive cash flow. It can also be used as a bridge loan to help a startup reach profitability or to finance an acquisition. It is often used to extend the runway between equity rounds, to smooth out cashflows, or to fund specific initiatives, such as product development or marketing. Venture debt can be a good choice for startups that need additional capital to scale their business but do not want to dilute their equity. This structure allows the lender to participate in the startup’s upside potential while limiting its downside risk, which in turn assists in its provision of “traditional debt” capital to “non-traditional” borrowers. In addition, unlike traditional bank loans, venture debt is often structured as a loan with warrants or equity kickers, giving the lender the right to purchase equity in the startup later. These lenders usually focus on a borrower’s ability to raise capital to fund growth and repay debt rather than other measurements for obtaining debt, which focus on historic cash flow or working capital assets. It is typically provided by specialized lenders who understand the risks and opportunities of the startup ecosystem. Venture debt is a type of debt financing tailored to startups’ needs. So, what exactly is venture debt, who is it for, what are its risks-and now, what is its future? First, to provide the overview we originally planned, but now, to also give our thoughts on its future. It is also important to note that the collapse of SVB was unrelated to its traditional business model and, more specifically, the business of providing capital in the form of venture debt.Īs a result, it is still important for us to cover this topic. Hercules Capital and Square 1 Bank, among others, provide the same or similar sources of capital to the startup ecosystem. But, SVB was not the only provider of such debt. Hopefully in two years, I can look back and realize that I was wrong, because another bank found a way to effectively lend to early-stage companies.The loss of SVB will undoubtedly constrain the availability of venture debt in the near term. This is the most expensive financing option for a company. If an early-stage company cannot raise debt, the company will need to take on additional equity. In addition, venture debt firms require a higher level of warrant coverage, which is more dilutive to equity investors. As compared to bank debt, venture debt interest rates and loan fees are higher than the interest rates and loan fees from banks. However, I have not worked with a professional investor who would even consider guaranteeing a portfolio company loan.įor early-stage companies that want to add debt to their capital structures, venture debt remains an option. (This collateral requirement is often a requirement for government loans as well.) I have seen founders personally guarantee loans. Banks that may be willing to lend to early-stage companies are likely to seek personal guarantees or other collateral. Early-stage companies will have fewer options for bank debt. I do not see any bank filling the lending niche that Silicon Valley Bank served in the near-term. The weighted average cost of capital for these firms will increase. ![]() The number of funding options will be smaller.Ģ. What does this mean for early-stage companies?ġ. ![]()
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