9/12/2023 0 Comments Svb venture debtOther providers will require a business to have enough runway – usually around six months’ worth. Requirements from providers vary, but generally, they require companies to have completed one or two funding rounds from private investors before backing them. You’re pushing the lender to act as a quasi-investor because they’re taking an earlier stage risk than most banks would ever touch.” W hat are the requirements? This is the first time these businesses take on debt. “It’s about the business plans, projections and prospects of the young business. “Lenders are trusting what the management tells them about the trajectory of a business,” Israel says. They will want an equity kicker, which is to say if your business is doing well, they’ll have a chunk of the shares at the end of the loan period. They may also take an equity warrant – a bit like a stock option. The interest rate is also higher – usually ranging between eight and 12 per cent – and pay-back terms tend to be shorter, usually between one and two years. So, while traditional banks require positive cashflow as proof you can pay back the loan, venture debt providers take into consideration venture capital raised and future revenue.Īs this is more risky than traditional loans for the lender, debt providers tend to follow venture capital investors they trust to give them the confidence in providing the loan. Debt serves high-growth, mostly pre-revenue start-ups backed by venture capital. Venture debt loans serve a different purpose to traditional bank loans. See also: Most active venture capital firms revealed Venture debt vs traditional loans Providers don’t require a member on the board, but in some cases can offer advice. Venture debt is an addition to venture capital and has the sole purpose of providing an early-stage business with liquidity in between funding rounds. VC investors are typically veterans in the industry who can link start-ups to contacts and provide advice. Venture capital provides capital in exchange for a slice of the business and usually a place on the board. The capital can then be used to finance R&D or purchasing equipment – the main benefactors tend to be companies in life sciences, SaaS and deep tech. “Typically, it is used for something more one-off, like a strategic move to a new market or an acquisition trail.”įounders can approach debt providers directly in between fundraising rounds, but sometimes venture capital firms will approach providers to help support a start-up. “You can use venture debt for a whole range of purposes,” Israel says. Venture debt serves two main purposes: to extend the runway of the equity round and act as a start-up’s insurance policy in the event costs are higher than expected. It means there is no dilution.” Why and when do you need venture debt? “Venture debt rides over that because there’s no need to amend the shareholder position. “It offers one core benefit for a company like that: by the time you’ve had two or three rounds of equity funding, you’ll potentially have quite a complicated cap structure, which means trying to do anything with shareholders becomes more complicated because you need lots of consent – it becomes a slow and perhaps cumbersome process. “Venture debt is essentially the first piece of debt a young, typically tech, company which has already had some – perhaps Series A or Series B – equity is going to take on,” Brett Israel of law firm Marriott Harrison tells Growth Business. The European Investment Bank likens the finance option to a student loan for a young business – where there are no assets to the company’s name but expect future earnings and returns. Venture debt can be offered to start-ups and scale-ups that don’t have significant assets and doesn’t require them to give up a stake – minimising the risk of equity dilution. It provides a start-up with liquidity between equity funding rounds and comes on top of venture capital, not instead of it. Venture debt is the loaning of capital to early stage, high-growth businesses which are backed by venture capital. But what exactly is venture debt? How do you get it and with the collapse and subsequent buyout of pioneer venture debt provider, Silicon Valley Bank (SVB), is it a good option for growing businesses right now? What is venture debt?
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