An article we liked from Thought Leader Zack Ellison of Applied Real Intelligence:
What Is Venture Debt? How Can It Support Diverse Founders?
This alternative to equity financing lets founders hang on to a bigger portion of their companies as they grow.
Venture debt consists of loans made to venture-backed startups that have reached a growth or expansion stage. These loans are typically made to Series B through Series D companies that are producing revenue and can service debt payments. Typically, a loan is made three to six months after a company has completed its equity raise and is designed to provide growth capital for founders to develop new products, enter new markets, expand their marketing and so on. Venture debt can be a cheaper, minimally dilutive alternative to equity financing.
In fact, the biggest differentiator between venture debt and venture equity is that venture debt is a lot less dilutive; equity dilution occurs when a firm’s owners sell shares in their company to raise capital. Venture loans are typically three to four years in maturity. The lender also gets some equity upside in the company through warrants worth 5 to 10 percent of the debt. Even with this equity upside, the financing package is much less dilutive, and much less expensive for founders, than a straight equity raise.
Venture Debt’s History
Venture debt originally was used by early-stage companies lacking the cash flow or hard assets, such as property and equipment, to qualify for traditional bank loans. To this day, venture debt focuses on this underserved segment of the market and is provided by only a handful of banks and non-bank lenders.
The biggest publicly traded venture lenders are Silicon Valley Bank and Hercules Growth Capital. However, a number of private venture-debt providers, including Western Technology Investment and ORIX Growth Capital, have long track records of success, as do innovative new entrants to the market such as Applied Real Intelligence’s Venture Debt Opportunities Fund.
Collectively, venture lenders provide approximately 10 percent of the total venture funding in the United States each year, representing more than $30 billion annually in 2020 and 2021.
Venture Debt Benefits
Venture debt offers many benefits for startups. It accelerates growth and expansion, extends the runway between equity rounds (or exit) and is much cheaper than equity financing. It is also much faster to obtain, taking only...
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Thanks for this article excerpt to Zack Ellison, Managing General Partner and Chief Investment Officer at Applied Real Intelligence.
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