• Blue Willow Group

Non-Dilutive Financing Solutions

Growth-Stage companies focus on the equity funding solutions – why give up the equity? Growing companies have a myriad of unexplored, non-dilutive capital solutions from financiers that specialize in the space.

What is venture debt?

Venture debt is, as the name implies, a debt funding option to growth-stage companies. It’s secured by a company’s assets, including IP or equipment. In other words, you’re borrowing a lump sum of cash up front, and in exchange for the cash, the loan will have to be repaid or refinanced. This repayment usually happens in monthly payments over the course of the loan, at interest rates in the 10 to 15 percent range.

The Pro’s

First of all, it’s an easy add-on after raising an equity round and can significantly help you extend the runway of your existing raise without giving up a lot more upside. You have your materials in order, the details are fresh in your mind and you have a funding friendly growth plan that you’re acting on.

However, the main advantage is that debt is cheaper than equity, and it always will be. Whereas the price of equity shifts based on your valuation, venture debt leverages equity to take on debt at far better terms than what traditional lenders—who are notoriously skittish about early-stage software companies—could provide. Plus, venture debt lenders don’t take board seats and there’s less equity dilution.

The Con’s

Venture debt, naturally, comes with a few big potential downsides. The most concerning is the possibility of dangerous financial covenants. For example, if you don’t grow as quickly as planned, then may not meet certain metrics required in your loan document like net income losses or coverage ratios. This can lead to a default. When you are in default, your loan is due and payable (all of it including accrued interest) right now. This could be a show-stopper for many startups.

Think of this as venture debt providers taking the backdoor in and seizing a slice of control. Although they’re not on your board telling you how to run your business, if you don’t run it according to the metrics they set forth in the loan terms, they’ll pull their investment.

The Gist

The point is, when exploring the venture debt markets, it’s important to have the right people working with you. You need someone focused in this field, who knows the lender landscape, how to negotiate with the lenders, where their concessions are and their sticking points. This is all imperative in avoiding the pitfalls of taking on venture debt.


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