When early-stage B2B SaaS founders are building their companies, the first thing they go out and seek is venture capital.
But as founders seek to grow their business, we often advise them to consider other forms of financing, as well. Venture debt is a collective term for minimally dilutive loans used to finance growing, venture-backed companies. While as VCs we seek to invest early in companies with the potential for rapid growth and assume a large amount of risk with our investment, venture debt is aimed at funding companies with a track record of growth (though there is always risk involved in this asset class).
Golden Section offers venture lending as both an alternative and a complement to equity financing. When applied with the right candidates in exactly the right way, it can be a source of healthy growth.
Stopping the Chase for Capital
The main downside with equity financing is that while founders get the resources they need, they gradually lose control of their equity as each subsequent round of investment dilutes the founder’s ownership. With venture, the equity dilution occurs at the closing of the raise and typically ranges between 15% to 20% of the company.
This leads many founders to seek higher valuations and yet more capital, while neglecting revenue growth. This is not a sustainable way to grow a B2B SaaS company, and not what we preach.
At Golden Section, we don’t believe in chasing the next round.
Instead, we advise our portfolio companies to efficiently use capital to achieve a revenue growth flywheel. For startups, the revenue growth flywheel typically involves a focus on acquiring and retaining customers, increasing revenue per customer, and leveraging customer feedback to improve the product or service.
Knowing that, how can venture debt assist founders in this process?
Empowering Revenue Generation
Taking on venture debt can help founders as it provides the capital to ramp up expanding and perfecting their marketing and sales efforts along with other forms of revenue growth. If they have recently raised a round of equity, or are in the process of doing so, they may also need to extend their runway in other ways, without taking on excessive dilution.
Venture debt can be processed more quickly, and unlike the high rates of dilution incurred with venture capital, dilution is typically in the form of a warrant amounting to just 1% to 5% of the company. At Golden Section, we consider companies with a track record of ARR growth and an effective marketing and sales team to be good candidates for venture debt. We believe these companies are best poised to leverage debt while rapidly expanding their growth efforts.
Leveraging the capital from the loan to ramp up marketing and sales ultimately means sustainable, (and profitable) growth for the company.
Understanding the Terms
While many companies may want to consider taking on venture debt, we don’t always recommend this route. When a company is pre-revenue, or when an influx of immediate capital is needed, taking on venture debt is rarely the right option. After all, venture debt is a loan with a contractual repayment term, typically monthly.
The cost is set by a predetermined interest rate at closing, typically in the low to high teens. Lenders often rely on revenue as their form of repayment, so it is important to think carefully about the ramifications of taking on debt.
The Golden Section Approach to Venture Debt
At Golden Section Lending, our offerings are specially designed to provide driven founders with the resources to get to an exit without excessive dilution. It powers efficient sales organizations to create $4 of ARR from each $1 borrowed, which translates into $10 of enterprise value for $1 invested into a sales and marketing budget.
In our decades of experience working with companies at different stages of growth, we know how important it is to get personalized advice on how best to finance your venture.