TL;DR - Venture Debt can be used as emergency funds or to prevent dilution. Venture lenders and VCs do not decide using the same variables
Helpfulness - 5
Topic Tags - incentives, Venture debt, founder advice
- What is Venture Debt used for?
- What do Venture Loaners consider?
- Venture debt can be used taken for similar reasons to Venture capital.
- Venture debt can also serve as “an insurance policy, protecting the company from potential delays or an emergency bridge round. Startups may choose venture debt over an additional VC round to minimize further dilution.”
- VL (venture lenders) prefer startups that have at least raised a series A.
- Many VLs Do Not Focus on Loan to Enterprise Value Ratio.
- Normally ranges from 10-40%
- The amount lent depends mostly on MRR, falling anywhere from 2x-12x MMR
- Most loans extend runaway by 3-6 months, but 6-12 month extensions are not uncommon
- VLs don’t care as much about the market as VCs do, VLs focus on variables that model how likely a company is to pay the debt back with interest.
- VLs like to see month over month and year over year growth. They are still VENTURE funds and do not invest in stagnant companies.
- 2 structures: Interest-only for the first 3–12 months, followed by principal plus interest. Interest-only for the entire duration of the loan, typically 2–4 years, followed by a balloon payment.
- Bank-backed VL offers lower interest rates but requires founders to use their banking services. (1-3% above Prime rate)
- VL firms often have steeper interest rates, anywhere from 7-16% above Prime rate
- VL is a relatively new industry
- VL normally does not look at founder credit scores.