• Blue Willow Group

More Companies Finding Venture Debt Attractive as VC Funding Falters

If you had any plans for a capital raise in 2020, now is a great time to consider exploring a venture debt facility as an alternative. In a recent Analyst Update for Q2, PitchBook provides some timely analysis on the topic. I’ll attach a link to the article below and provide my own thoughts on the subject.

Many clients with whom we’re speaking were either working on an equity raise or planning one for later this year. The pandemic hit, the world changed, equity investments slowed or were paused altogether, and valuations changed significantly. Some found that if they could raise equity the terms were much less favorable and valuations were reduced. Others have simply been unable to find investors. Even with significant reductions in burn, many companies still must raise cash to continue operations and position themselves for continued growth and expansion. So how can a company get through the next several months until equity becomes available and terms are potentially more favorable? Enter venture debt as a possible alternative. Here are some suggested strategies based on current cash on-hand and runway for a few scenarios. It is assumed the company has reduced burn and revised projections and plans to still show growth.

12 months + cash on-hand: This is the best case scenario given the current market conditions. As we’ve discussed in the past, it’s always easiest to look for cash when you have some. With continued uncertainty, we suggest our clients consider bolstering their balance sheets with additional capital. Structures here often include term loans which do not require drawing-down on the full amount at closing. Companies have access to the facility but don’t need to make payments on money they aren’t yet deploying. We can often negotiate interest-only periods of 6-24 months on these types of facilities to further improve cash-flow.

9-12 months of cash on-hand: Unfortunately, many of our clients are in this situation and it can be a tough spot. These are the clients who were most likely to have been working on an equity raise when the pandemic hit or were planning on a raise later in the year. Lenders need to see enough liquidity for continued growth and operations as well as the ability to service the new debt. While these requests can be funded, be prepared for increased lender diligence and perhaps less favorable (but still reasonable) terms. In some cases, lenders will want to see additional capital provided by current investors to come in alongside the new debt.

9 months or less of cash-on-hand: Lenders willing to consider these requests are fewer in number and more restrictive and expensive. That said, there are options out there for companies with limited cash who need capital to continue moving forward. These facilities can be very effective short-term solutions for cash-strapped firms. Talks with current investors to bring in additional cash via convertible notes or other equity strategies to get more cash on the balance sheet can often be the best first step prior to approaching lenders. We often discuss this strategy to ensure clients are positioned to receive the most favorable terms possible from lenders.

Granted, I’m biased, but this is a great time to speak with an advisory service such as the team here at Blue Willow Group. Our mission is to help companies navigate through situations like these and achieve capital goals in an efficient and cost effective manner. We might not be helpful when it comes to murder-hornets, but we’re well positioned to assist you with any venture debt needs you may have. Please reach out if you have any questions or would like to discuss. As promised, the link to the Pitchbook article is here:

We wish you and your teams all the best and hope you stay safe and healthy!


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