The Dynamics of Venture Debt

A Valuable Tool

Every entrepreneur is familiar with the classic venture capital model: early-stage, equity financing for entrepreneurial enterprises involved with new technologies, evolving business models, and the creation of new markets.

Venture capital offers a classic trade-off: entrepreneurs get an infusion of capital. They give up a slice of equity. It’s an effective financing model. But it’s not the only model for entrepreneurial companies.

Enter venture debt.

Venture debt doesn’t get the kind of headlines reserved for venture capital, though it has played a key role in the development of companies like YouTube, Facebook, OncoMed, Proteolix, Ruckus Wireless, Cyan Optics, and many others.

As the name implies, a venture debt transaction is a loan—typically a non-convertible, senior-term loan. But it’s better to think of venture debt as a powerful and strategic financial tool.

Venture debt complements venture capital. Venture debt can be useful for companies that seek greater flexibility for their balance sheets. Used effectively, venture debt can enable a company to reach growth goals, hit important milestones, and achieve a higher valuation—before the next equity round.

For many entrepreneurs, those are tangible benefits.

Typical Applications

Broadly speaking, venture debt is generally applied in these situations: as growth capital to finance opportunities with the potential to dramatically steepen the growth curve; as a source of acquisition finance; and for capital (equipment) investment.

In situations like these, a venture debt transaction can provide much-needed resources while preserving ownership, particularly when it’s too early in a company’s life cycle to do another equity round or the amount of capital required is too small for a traditional equity financing.