What is Venture Debt? Answering Startup’s Common Questions

What is Venture Debt?

Venture debt is a form of debt financing designed specifically for high-growth companies, typically those who have already completed a professional funding round, from a venture capitalist, private equity or family office.

Unlike traditional bank loans that prioritise a company’s profitability, venture debt lenders look primarily at a startup’s growth potential and use venture capital support as validation for protection and creditworthiness.

It is important to note that venture debt does not replace equity financing, rather they both tend to work hand-in-hand. Venture debt complements equity financing by providing additional capital while letting founders preserve ownership.

‍

Commonly Asked Questions by Startups

1. Why does my startup need venture debt?

Venture debt can be a viable option for startups that are looking to retain more ownership and control, bridge the gap between equity financing rounds and continue to close opportunities for high-growth.

Securing venture debt can signal to potential equity investors that your startup has good financial management practices and is attractive to lenders, helping to raise capital at a higher valuation at future equity rounds.
‍

2. What is the typical profile of a startup that is considered a good candidate for venture debt?

Here’s a list of the main characteristics that make a startup an ideal venture debt candidate –

• ‍Venture capital backing – This serves as a point of validation for venture debt lenders, demonstrating that other investors believe in a startups potential. ‍
• Stable revenue stream – the startup can demonstrate a stable revenue stream or at least a business model with highly predictable revenue. ‍
• Clear path to profitability – Though not yet profitable, the startup will showcase a clear trajectory towards profitability. ‍
• Clearly defined use of funds – Startups seeking venture debt should have a specific well-defined plan for how they intend to use the funds. This might involve financing growth initiatives, investing in marketing campaigns, or making strategic acquisitions.
  ‍

Unlike early-stage venture capital investments, venture debt is typically better suited for startups that have already achieved market validation and proved the value of their business, and are now focused on securing capital to accelerate their growth.
‍

3. What is the required valuation for my startup to qualify for a loan?

There is no minimum valuation required for venture debt funding. Valuations are sometimes used as a guide for the amount of debt a business can take on, calculated as a percentage of the last valuation. Percentages will vary by lender and individual circumstances.

The business valuation is also important for calculating the price of warrants. Most venture debt agreements include warrants, financial instruments that give the holder the right to buy a company’s stock at a set price (strike price) before a specific expiration date.  

Warrants provide venture debt lenders potential future upside in addition to interest paid on the loan. They are also significantly less dilutive for founders, when compared to traditional equity fundraising.

Most lenders will use a variety of methods to assess a startup’s valuation and want to ensure the startup has a reasonable and defensible valuation. It is crucial for startups to be honest and transparent about their number and be prepared to provide the necessary documentation.

Some of the methods to assess a startup’s valuation include –

• Recent equity financing rounds
• Financial health
• Business predictability
• Market size and growth potential
  ‍

4. What is the maximum amount of debt I can raise?

This very much depends on specific lender policies. Different lenders have varying criteria and risk appetites, which can affect the maximum amount of debt they’re willing to provide.

Understanding your company’s financial health, growth potential, and existing funding can be extremely helpful in helping you navigate the debt process and securing the most favourable terms.
‍

5. When is the optimal time for my startup to consider venture debt?

The most ideal scenarios to consider venture debt include –

• ‍Bridging to profitability – to secure short-term financing to reach profitability to taking additional equity funding.‍
• Before a valuation milestone – to strengthen your financial position and secure a higher valuation in the next equity round.
• ‍After an equity round – to extend the runway provided by a recent equity financing round.

‍

6. What are some potential risks that may be associated with venture debt?

While venture debt is a desirable financing tool for startups with high growth potential, it is important to consider some of its potential pitfalls, though this will vary depending on the specific lender.

• Higher interest rates
• Repayment burden
• Covenants
• Risk of over-leveraging

Ready to Grow with Fundabl?

If you have an established startup business and are ready to accelerate growth, Fundabl provides venture debt solutions designed to help you seize new opportunities. We offer the capital needed for expansion with a simple, straightforward repayment plan to ensure convenience.

Our venture debt solutions are typically used to –

• Bring forward expansion
• Complement equity
• Take advantage of M&A opportunities
• Extend your runway

At Fundabl, we offer tailored solutions, efficiency and focus, alongside utmost transparency and support. Get started today.