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Venture Debt

Venture Debt Lenders

For startup enterprises and other early-stage companies, venture debt can provide opportunities for growth and sustaining operations while equity funding is secured from additional funders or other resources.

Venture debt companies and venture debt lenders work with organizations to complement equity financing while avoiding ownership dilution of a company’s equity stake. Venture debt can also be used to secure funding for capital or inventory expenses, as a means of lengthening your runway until the next round of equity, or to help a business make acquisitional transactions.

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Venture Capital Fund

A venture capital fund, on the other hand, is the amount of money contributed by investors that contribute to the early-stage development of new and startup enterprises.

Venture capital firms bridge the gap between sources of funding for innovative new enterprises. For founders looking for viable pathways forward to help grow their companies with relatively more leeway in regard to repayment timelines, venture debt provides an invaluable opportunity. 

When utilized alongside equity financing and other funding resources, venture debt financing empowers entrepreneurs and founders with opportunities to grow their companies and see their ideas come to fruition without losing out on equity. Since venture debt allows founders to retain control of their enterprise’s equity, your business can focus on achieving growth objectives without having to worry about diluted ownership or curtailing your vision for the future and success of your enterprise.

Capital Efficiency

By leveraging capital intelligently and efficiently in order to accomplish steady revenue increasements, venture debt can fit into many business strategies where revenue growth is the ultimate goal.

Venture debt can also be beneficial for organizations prioritizing growth before profitability – at least in the relatively short term. For companies in the seed stage of development, undertaking significant debt of any kind isn’t ideal, but there are several potential upsides to securing venture debt as a means of financing the next stage of your company’s growth and development.

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Types of Venture Debt

Before deciding if venture debt is appropriate for your organization, it’s vitally important to understand the various types of venture debt. If you are a founder who has recently secured enough funding for an equity round and you are interested in extending your company’s runway, securing venture debt may be the next right step for your organization. Or, in any circumstance in which minimizing ownership dilution is the primary objective, a venture debt loan can help your organization build upon your existing and highly capable sales and marketing divisions.

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Venture Debt Structure

    A venture debt structure is usually laid out over a multiple-year amortization timeframe. This can look similar to the terms of a growth capital loan which often involve interest-only (I/O) payment periods. Throughout the duration of the I/O period (which may vary depending upon the agreed-upon terms of the loan), the company will pay down accrued interest only, not any principal amounts. At the end of the I/O stage of the loan, the company then begins to pay the principal balance of the remaining loan.

     A venture debt example might look like a young SaaS company unable to secure other loans from banks and similar lenders because of a limited amount of physical assets. Without sufficient facilities or physical, tangible assets for banks to leverage as potential collateral, the young SaaS company could likely secure venture debt as opposed to other, more traditional lending methods.

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    Venture Debt vs. Venture Capital

    The primary difference when considering venture debt vs. venture capital is that venture debt must ultimately be repaid. Venture capital, on the other hand, is more akin to general fundraising; venture capitalists, like wealthy individuals, may provide cash to an enterprise still in its infancy in exchange for a stake in potential future profits. Similarly, there are several key differences one must consider when looking at venture debt vs. bank loan sources of funding.

    Venture debt, however, involves a handful of important distinctions – namely, that it is a loan that needs to be repaid as per the agreement. While their ultimate purposes may be rather similar, the differences between venture capital and venture debt could not be clearer. For organizations that have exhausted avenues for venture capital to provide sufficient funding, securing a venture debt loan from a specialty firm could be a reasonable next step to ensure the longevity and success of an enterprise.

    If you are in the unique position of having a choice between which type of growth funding you want to secure for your organization, there are a variety of factors to consider. Do you value the accessibility of venture capital funds over the lower cost of venture debt loans? Do you want the increased involvement of the venture capital investor(s), or would you prefer to preserve your organization’s autonomy?

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    Factors for Consideration

    Venture Debt Providers

    While most banks are happy to provide loans to qualified businesses, not all banks provide venture debt loans. Venture debt providers like venture debt firms differ from traditional bank lending methodologies by minimizing or mitigating the possibility of equity dilution. There are dozens of venture debt firms from which to choose that will work with you to help secure additional funding for your organization. Each lender has its own unique attributes, strengths, and weaknesses, and you may need to consult multiple lenders before finding an appropriate fit for your enterprise and your objectives. Identifying a good match is vital because an inhospitable provider may throttle your enterprise’s growth with onerous repayment stipulations.

    Before making any final decisions, cautiously consider elements like the total sum of the lender’s fees and ensure that there are little or no hidden fees written into the terms of the agreement. Borrowers also want to ensure that they secure only the necessary funding and no additional cash; accept an amount that can cover runway costs for approximately six months – enough to adequately finance day-to-day operations, hire and pay employees, and secure sufficient growth for the next round of financing.

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    Debt Funding for Startups

    Venture debt for startups can be the difference between an enterprise actualizing its goals and being unable to grow or achieve enterprise objectives in a timely manner. Debt funding for startups can also provide additional resources and relationships as your business grows and matures. It’s common knowledge that the majority of startups end in failure, so in order to ensure that your enterprise doesn’t become another grim statistic, you must thoroughly consider all of the options available to you.

    Startups stand to benefit a great deal from venture debt funding initiatives for a handful of reasons – chiefly among them is that a venture debt loan generally provides more flexibility than other funding methods because venture debt can be leveraged as a kind of “cash cushion” against pitfalls in daily operations and other difficulties securing capital. And because it can be quite challenging for many startups to secure venture capital funding, venture debt funding can provide that additional cash flow to help your organization make it to the next stage of its evolution.

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    Venture Debt Terms

    When considering whether or not venture debt may be right for your enterprise, you want to be sure to consider the fine details – venture debt interest rates as well as the venture debt terms. If the venture debt rates don’t look like they’ll provide your organization with sufficient capital, or if they include binding and strict clauses about fees and other possible accruable expenses, you might want to consider other options.

    If you are able to come to an agreement with a potential lender, however, here’s what you might be able to expect. Most venture debt loans are structured over a multiple-year timeline, rarely in excess of five years. It’s commonly expected that a venture loan will afford a portion of the first year as an I/O payment period, generally between three months and one full calendar year. You can also expect a single fee upfront for arranging the loan and interest rates of around 10% with some wiggle room for repayment flexibility. There is almost always a warrant component, and sometimes borrowers can expect a back-end or final payment fee to compensate the lender for taking the risk and facilitating the agreement.

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    Venture Debt Calculator

    By utilizing a venture debt calculator (in conjunction with a revenue calculator), you can determine the values of your venture debt term sheet and determine a venture debt loan that would be sufficient to extend your organization’s runway.

    In order to determine if a venture debt loan is the best course of action for securing additional capital for your enterprise, you must first make a baseline assessment. How much capital are you looking to secure, what is the current estimated value of your company, and what is the current actual value of your company? Additionally, what is the estimated value of your company upon the completion of the loan agreement? From this point, you can assess what you can feasibly afford in terms of the up-front fee, any ending facilitation fees, as well as legal fees. Depending on the length of the agreement and the agreed-upon interest rate, you can successfully calculate a venture debt loan agreement plan that fits within the founders’ vision for your organization.

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