Entrepreneurs who are actually lucky enough to receive funding from Venture Capital Firms are noted to be eligible for double whammy, which is Venture Debt. This is an obscure form of funding, which is not even tracked by the National Venture Capital Association, which otherwise publishes market statistics and data on the venture capital.
As per some of the pros in this market, venture debt is always about 10% of venture market and the number is growing every year for sure. Last year, the venture capitalist group has invested a whopping of $84.2B in the companies. IF these figures are right, it means that more than $8B was lent as the venture debt in 2017. So, what is this venture debt all about? This is primarily termed to be an added form of financing with merits and some dangers to watch out for.
Such checking on venture debt:
The current idea of the venture debt is super simple. It will offer a firm of added capital in debt form for reducing to heavy dilution suffered by the same team. For example, any new startup which has easily raised a round of $500k at $2M valuation and then has risen $8M through Series A will have a valuation at $20M.
Right at this point, the founders might have given away around X% to the said investors,. The entrepreneurs might still have need for more capital in terms of purchasing equipment or just finding advertisement for added growth. But, without adding more to the dilution, the entrepreneurs pan to add some venture debt to raise and save dilution for any future Series B round.
Ways in which this service works:
Venture debt is mostly noted as debt offered in which the fun lends set percentage of last equity raise. The loan amount is mostly around 30% of last round. If you take up the previous example, this might have been at $2.4M, which will bring in a Series A raised to around $10.4M. You can further get a clue about the services from nationaldebtreliefprograms.com right away.
The loan terms seem to be a bit complicated. There is always a cost noted for borrowing money, along with a cost while the money is being loaned. There will also be a cost for existing loan.
On the other hand, the loan will have period of interest based repayment only. It is widely used for a short term of around 6 months and then interest repayment and repayment will be over a period of 2 years.
Venture debt is often stated to be a short term form of financing instrument, which will cost you around 20% of loan over the period of two years.
The fund will further receive warrants for sure, which is in case the company gets sold down the road can then turn 20% into 2X or even more, in return terms for the lender. So, clearly being in venture debt seems to be a lucrative and useful option for all.
Time to head towards the venture debt:
There is always a place settled for venture debt in capital structure for most of the companies. most importantly, in case the company needs to purchase equipment while in growth phase and has already eliminated concept phase risk and even come across product market fit, then the field of venture debt will always reduce founder and investor dilution. It will further receive the capital otherwise needed by your company for the growth.
You can log online and check out some of the articles from reliable businesses which have used the help of venture debt. Here, they will talk about their decision to go into this debt. The business owner wants to ensure that the company has capital used for buying enough inventories for holiday season. However, raising more venture debt at this point makes no sense.
Always remember that holding onto equity is not just about maximizing payout down line. It is also about maintaining proper control over operations and strategy. Equity always remains precious. Giving it to capitalize on short term opportunity one which might be funded as easily with debt as shoddy way of running any business.
Time when you don’t need venture debt in your life:
There are some downsides available to venture debt, just like any other debt, which can lead to devastating results. In case the company defaults on any repayment covenants or terms, the venture based debt managers can call loan and then force companies to be liquidate or sold. This task is no doubt rare, but it is possible though.
Primarily, the current venture firm sitting on board while helping renegotiate new terms can be costly. Right at this point, the firm might have a bump in plan which will see founder equity disappear while venture mangers need to raise added fund or Sell Company to repay debt and what it left to pay venture firm and angel investors. Here, the founders end up with nothing.
Some common advices to follow:
One common advice related to venture debt is to not raise capital through venture debt if you do not already have access to capital. Financing companies with debt when the firm has no means other than VC investors to repay is always a bad financial management and decision to make. Sometimes, venture debt might create issues in later equity rounds. Whenever a firm has venture debt and needs to raise added capital with equity round, new investors will then agree to repay debt or invest below debt for preferences.
These situations are not proven to be ideal for new investors, who might see capital go directly to company and could be well discouraged from any sort of investment. Some might caution that rising through the field of venture debt is bad idea whenever the firm has high burn rate, use of loan is unclear and with variable revenue stream. It is also bad during debt payments which might account for over 25% of operating expenses.