What is Venture Debt?

2 min read Venture debt is a form of debt financing for venture-backed companies that lack the assets for traditional debt funding. Venture debt has been around for as long as venture capital has been writing checks for equity investments in conjunction with equity fundraising. It typically runs for three years and is secured by the company’s assets. This article discusses what venture debt is and how to use it.

What is Venture Debt?

Venture debt can reduce dilution and give your startup more runway. Venture debt used with equity funding can go towards the purchase of equipment, make acquisitions, or make up for funding not acquired through the equity raise. The points below will help when deciding if venture debt is a good fit:

  • If the company is in a difficult cash position, venture debt will come with higher interest rates.
  • Also, the proposed debt payments are higher than 20% of operating expenses.
  • If the company has stable revenue and predictable receivables, then a line of credit may be a better choice than venture debt.
  • Some tie venture debt to the company’s cash or accounts receivable.
  • Covenants around venture debt such as ‘material adverse change’ can trigger a recall of the debt early.
  • It helps to understand how the lender performs. Check their history to find out more.
How To Use Venture Debt

Venture debt is not for every startup or all fundraises. It is best used in conjunction with an equity raise. The equity funding provides ongoing working capital that does not need to be repaid. It works well between equity raises from institutional investors.

The business must be up and running with stable revenue. Those with recurring revenue are a good fit. Those with healthy gross margins also do well. Investors will look at the business’s cash flow, so it’s essential to have a beneficial cash flow statement. It doesn’t work well for seed startups that are still looking for product-market fit.

Established businesses will find it easier to raise venture debt as the investor will look at the company’s traction, track record, business model, and previous fundraises. Venture debt raises are typically limited to 25% of the equity raises, so a $3M fundraise most likely will not exceed $750K of venture debt. Venture debt loans can last for four years and are used for specific projects, not working capital. 


Read more in our TEN Capital Network eGuide: Alternate Investing.

Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

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