Usually a term loan or line of credit, venture debt is a form of non-dilutive financing that complements equity. Smart companies use venture debt to invest in sales and marketing, accelerate product development, enable more hires, fund acquisitions, and ultimately drive growth. Sometimes companies also seek out venture debt in order to have more working capital on hand.
If you’re running a fast-growing company that doesn’t have significant assets or positive cash flows, and you don’t have access to traditional bank loans or material amounts of bank financing as a result, venture debt can be a very effective debt financing tool. In this post, we’ll look at some of the specific ways that using venture debt as a complement to equity funding can help you and your business. That includes:
1. Achieving a higher valuation.
The higher the valuation you get when you raise equity, the better it is for your business. Companies often use venture debt to extend their runway so that they have more time to grow their business before their next valuation.
2. Securing greater upside.
Dilution is a serious consideration any time you raise equity. By using venture debt to meet a portion of their financing needs, founders and CEOs can minimize the dilution they suffer and ultimately see more upside when the business eventually exits.
3. Maintaining control.
Using venture debt results in less dilution, providing founders with greater economic and strategic control over the business they worked so hard to build.
4. Bridging to equity.
Sometimes founders and CEOs find themselves in a position where they want to achieve certain operational or financial milestones before raising equity, or where they could simply use additional funding leading up to an equity raise. Using venture debt can help companies accelerate momentum and maximize liquidity thereby optimizing their negotiating position going into an equity raise.
5. Taking advantage of acquisition opportunities.
Acquisitions can help companies drive growth, expand into new markets, or secure complementary technologies or solutions. But financing them can be challenging. Venture debt can often be secured more quickly than other forms of financing, enabling companies to take advantage of strategic opportunities.
6. Maintaining strategic flexibility.
Bringing on a new investor often means re-setting the clock and committing to a plan (and time horizon) that promises to deliver the investor’s target return. Using venture debt can help founders maximize their flexibility when it comes to deciding when and how to exit.
While it’s important to ensure that your business is always well capitalized, finding the right combination of capital sources is critical. Your goal should be to optimize your company’s cost of capital while putting yourself in a position to maintain more control over the business longer. In our view, the best way to do that is by blending equity capital with debt capital.
To learn more about venture debt and how it works, check out “Venture debt: An alternative growth financing option.”