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| Venture Debt

How private debt & equity can support you when your forecast has shifted to the right

If you’re a CFO who is faced with delayed growth plans, making cutbacks and a sales forecast shifting to the right, you may think your choices are limited.

But the reality is, despite the crisis, there are still investors committed to supporting tech companies through the peaks and troughs of scaling a tech business.

For instance, did you know that despite coronavirus uncertainty, technology investors Insight Partners has raised $9.5bn for its newest and largest fund yet?

That’s right!

At this point you realise, now is the time to get options on the table. 

To help you get started, here’s what  you need to know about the private debt market.

 

What is private debt?

Private debt is a term given to debt investments not financed by banks or traded in an open market.

You may also hear private debt described as alternative debt, direct lending or private credit.

Typically, the people who run private debt funds have strong backgrounds in commercial banking.

Better still, many focus on niches and have expert knowledge of the markets in which they work.

 

How did private debt come about?

 

After the 2008 global financial crisis, bank lending to mid-market companies shrank because bankers had to repair their battered balance sheets and contend with stringent new regulations.

So alternative financiers, including private debt funds, stepped in to fill the gap.

And fill the gap they did. In a report titled: The Rise of Private Debt as an Institutional Asset Class ICG tells us: “In the US, “non-bank debt accounts for 75% of total corporate lending, compared to 10% in the Eurozone and 28% in the UK.”

It added: “Private debt is growing in the UK and Europe as investors realise its strong returns.”

Elsewhere, in its <Alternative Lender Deal Tracker Spring 2019 report, Deloitte link to report states: “Surveys show that the private debt asset class as a whole is forecast to hit $1.4 trillion globally by 2023, passing real estate in becoming the third-largest alternative investment asset class after hedge funds and private equity.”

 

What makes private debt attractive to tech companies?

 

Private debt makes it easier for tech company CFOs to raise finance to support a specific need. For example, time sensitive and capital intensive M&A activities.

But that’s not all. Private debt relieves some stress placed on tech company CFOs who need to raise finance during the turbulent global economic and political environment.  During these times, banks have little appetite for risk.

 

What are the advantages of raising private debt over bank debt?

 

First off, private debt funds can provide more flexible loan structures. In direct contrast to bank lending, private debt funds can offer unsecured options. They also consider non-amortisation loans.

Then because many private debt funds focus on sector niches, they can provide less restrictive terms, including less stringent covenant packages.

After that, close access to decision-makers means private debt funds can shorten credit processes and increase the speed of execution.

Unlike bank lending, private debt funds do not restrict your use of funds.

Beyond that, you can use private debt to replace, top-up and complement existing finance facilities.

Most compellingly,  private debt allows companies to access more significant loan amounts without diluting equity.

 

For what purpose do tech companies use private debt?

 

During these unprecedented times, you can use private debt to:

 

  • Manage your cash burn rate
  • Set up working capital buffers
  • Maintain your liquidity
  • Get funding to weather inflection points and make strategic pivots where necessary

 

How can tech companies access the right private debt funds?

 

In its Alternative Lender Deal Tracker Spring 2019 report, Deloitte noted: “The private debt market can be overwhelming, with numerous complex loan options offered to borrowers.”

To find the right private debt fund, and structure the right private debt finance deal consider talking to a specialist private debt brokerage firm.

It is in a specialist private debt broker’s interests to find and close private debt finance deals with minimum strain on your time and resources.

 

So it all adds up to this

If you’re worried about a sales forecast shift to the right, and lack of funding available, then talk to a specialist private debt broker. 

With their help you can ready your war chest to help you to deal with the unprecedented changes in the business environment.

In particular, a private debt broker can get you options on the table to help you to maintain your cash runway, liquidity and make strategic pivots where necessary.

Trust me; you’ll be glad you did.

Here’s what you can do now to improve cash flow and liquidity

What should I do now?

You’re not alone.

CEOs and CFOs are all asking the same question.

Covid-19 is challenging every business to operate in a tremendous time of uncertainty.

  • How long will it last? 
  • What will it mean for our working capital and liquidity?
  • Will credit markets seize up?

These are questions no one can answer.

But having said that, there are things you can do to prepare. 

Here are some questions we can answer. Also, here’s how we can help support you with getting funding options on the table during the Covid-19 outbreak.

Rest assured, we will update you as and when we get more information.

 

1. Can I still access funding? Are private debt funds even lending?

 

The good news is the answer is yes. But obviously, it might take a little more time than usual to get answers and secure funding. 

 

2. Should I wait to borrow, or take action now?

 

Given the extra time it will take to secure funding, now more than ever before, we recommend planning ahead and to not leave it to the last minute to seek funding.

 

3. What options do I have available?

 

Private debt funds and in particular venture debt specifically caters to the needs and perceived risks associated with tech companies.

You can use private debt facilities to top-up replace and complement existing finance facilities.

In times of uncertainty, you can use private debt to:

  • Extend your cash runway
  • Enhance liquidity and improve working capital
  • As a cushion to protect your company against potential delays, a strategic pivot, or if you need more cash than initially planned.

 

Elsewhere you can strengthen your business financially by refinancing your existing debt. Because when you refinance your debt you can:

  • Secure more favourable terms
  • Free up cash flow to generate more working capital
  • Free up capital to reinvest into your business
  • Have greater operating flexibility
  • Reduce your cost of capital
  • Get fast access to cash

 

4. What about the cost of capital?

 

The paramount concern of any lender is risk. 

So if you have a solid business plan, and up and until now operate in a market with plenty of room to grow, then you have a good chance of raising the funds you need at a reasonable price.

 

6. Should I even be considering taking on debt during a crisis?

 

The answer to this question depends on an individual business.

If your business model is robust and you operate in a market with plenty of room to grow, then it’s worth getting options on the table.

You could consider taking advantage of low-interest rates and getting capital in place for when the economy and the market recovers.

During this crisis, banks may lose their appetite for risk. Therefore it may take months to secure the money you need.

However, as I’ve mentioned before, many private debt funds take a specific interest in the tech sector and structure loans accordingly.

To get their attention, talk to a specialist private debt fund broker. Due to the amount of transactions sourced, structured and closed, a broker will have good relationships with funds with capital to deploy. 

 

How is Fuse Three operating during the lockdown?

 

Thanks to the tech sector, in particular, SaaS businesses, it’s business as usual for Fuse Three, albeit from a different location.

Of course, we’ve asked all our staff to work from home. Fortunately, we already employ remote workers, so they’re used to it.

Finally, we expect more change over the coming days and months. But like you, we’re an agile company and as such, we’re equipped to carry on supporting you.

We’re in this together.

[Private debt for growth datasheet] Maximise funds available

If you want to know how you can maximise funds available to your fast-growing tech business, also, how to reduce dilution and fuel your business growth, then you’ve found the right place. 

We’ve put together an easy to digest private debt finance for growth datasheet for time-starved CEOs and CFOs who want to learn about funding options available to them.

You’ll want to download this private debt finance for growth datasheet if you’re:

  • Scaling up your business and need flexible finance to help you to take on new staff, move to larger premises or drive new business by increasing your sales and marketing efforts
  • Considering growing your business by expansion into new territories, or even an acquisition
  • Wanting a financial cushion to protect you from a challenging business environment or a downturn

 

Key takeaways from this private debt for growth datasheet:

Our private debt for growth datasheet sets out:

  • Why more and more tech businesses use non-dilutive, flexible private debt finance to grow and scale their tech businesses
  • How private debt finance for growth works
  • How private debt finance differs from conventional debt lending
  • A mini case study showing how private debt works in practice

 

Why download this private debt for growth datasheet?

Download this simple datasheet and, you’ll learn:

  • If private debt financing is right for you
  • How you can use the funds available
  • How to source, structure and negotiate the best private debt growth finance terms

Click the image of the datasheet below to start downloading the pdf

Private debt versus bank lending for tech businesses

Finding the right debt finance instrument to fuel the growth of your tech company can be stressful. You know there has been an explosion in private debt lending, but how do you navigate your way through the many funds in this complex new market?

Moreover, how can you tell the differences between bank and private debt lending facilities?

In particular, how do you fathom out the differences between debt fund loan structures and reporting requirements?  And the cost of capital?

Then, of course, how can you be sure your chosen private debt fund can deliver on its promises?

If you’re considering raising private debt for your mid-market tech business, in addition to or as an alternative to bank lending, here’s what you need to know.

 

What is private debt?

Private debt is a term given to debt investments not financed by banks or traded in an open market.

You may also hear private debt described as alternative debt, direct lending or private credit.

Typically, the people who run private debt funds have strong backgrounds in commercial banking.

Better still, many focus on niches and have expert knowledge of the markets in which they work.

 

How did private debt come about?

After the 2008 global financial crisis, bank lending to mid-market companies shrank because bankers had to repair their battered balance sheets and contend with stringent new regulations.

So alternative financiers, including private debt funds, stepped in to fill the gap.

And fill the gap they did. In a report titled: ‘The Rise of Private Debt as an Institutional Asset Class’ ICG tells us: “In the US, “non-bank debt accounts for 75% of total corporate lending, compared to 10% in the Eurozone and 28% in the UK.”

It added: “Private debt is growing in the UK and Europe as investors realise its strong returns.”

Elsewhere, in its Alternative Lender Deal Tracker Spring 2019 report, Deloitte states: “Surveys show that the private debt asset class as a whole is forecast to hit $1.4 trillion globally by 2023, passing real estate in becoming the third-largest alternative investment asset class after hedge funds and private equity.”

 

What makes private debt attractive to mid-market tech companies?

Private debt makes it easier for mid-market tech company CFOs to raise finance to support a specific need. For example, time sensitive and capital intensive M&A activities.

But that’s not all. Private debt relieves some stress placed on tech company CFOs who need to raise finance during the turbulent global economic and political environment. During these times, banks have little appetite for risk.

 

What are the advantages of raising private debt over bank debt?

First off, private debt funds can provide more flexible loan structures. In direct contrast to bank lending, private debt funds can offer unsecured options. They also consider non-amortisation loans.

Then because many private debt funds focus on sector niches, they can provide less restrictive terms, including less stringent covenant packages.

After that, close access to decision-makers means private debt funds can shorten credit processes and increase the speed of execution.

Unlike bank lending, private debt funds do not restrict your use of funds.

Beyond that, you can use private debt to replace, top-up and complement existing finance facilities.

Most compellingly,  private debt allows companies to access more significant loan amounts without diluting equity.

 

For what purpose do mid-market tech companies use private debt?

The most common uses of private debt in the mid-market include:

  • M&A finance
  • Refinancing
  • Growth finance
  • The buyout of minority shareholders

 

How can mid-market tech companies access the right debt funds?

In its Alternative Lender Deal Tracker Spring 2019 report, Deloitte noted: “The private debt market can be overwhelming, with numerous complex loan options offered to borrowers.”

To find the right private debt fund, and structure the right private debt finance deal consider talking to a specialist private debt finance advisory firm.

It is in a specialist private debt finance advisor’s interests to find and close debt finance deals with minimum strain on your time and resources.

And that’s what really matters.

 

And finally

If you’d like can help you to achieve your business goals, and we will set up a time to chat.

How private debt smooths GovTech cash flow peaks and troughs

On the face of it, the burgeoning B2G market offers exciting opportunities for the GovTech sector.

Public procurement is the largest single marketplace across developing and developed economies, accounting for around one-fifth of global GDP.

Better still, Governments around the world actively encourage private-sector tech start-ups and SMEs to transform public sector services to make them more efficient, responsive and accountable.

But operating in the B2G market has its challenges. 

In this interview, Private Debt Finance Broker Ifti Akbar explains how appropriate funding can help GovTech entrepreneurs manage the lengthy sales cycles and uncertainty associated with awarding and starting public sector contracts.

 

1 . What challenges do companies operating in GovTech face?

Slow and unwieldy procurement systems, complex tendering processes and multiple decision-makers result in lengthy sales cycles.

 

As a result, GovTech entrepreneurs can expect pressure on their cash flows and high customer acquisition costs.

 

Beyond that, Government departments operate to a fiscal year, ending in April. 

 

Consequently, GovTech entrepreneurs need to overcome problems of cost overruns, lumpy revenues and potential pivots, customarily associated with seasonal businesses.

 

At the same time, GovTech entrepreneurs need to manage investor expectations.

 

2. Does political uncertainty also pose a problem?

Yes. We’re seeing the largest increase in public sector technology spending in decades. But ongoing uncertainty over Brexit and now a General Election means GovTech entrepreneurs experience delays in funding filtering from strategic projects through to programmes scheduled to start in 2020. Again, this puts pressure on cash flow and investor expectations.

 

3. How can private debt finance help GovTech entrepreneurs?

It very much depends on your use of funds and where your GovTech company sits in the business lifecycle. 

 

Pre-profit start-up companies burn cash. If cash flow is tight because of lengthy sales cycles, private debt finance can extend your cash runway to the next valuation. 

 

On the other hand, growth-stage companies that have secured sizeable public sector contracts can use private debt finance to scale their businesses to cope with increased demand while maintaining efficiency.

 

For instance, large contracts can demand the appointment of new talent ahead of the curve, a move to larger premises, or even new product development.

 

Mature GovTech companies can use private debt finance to fund acquisitions or buyout a shareholder. 

 

4. When should GovTech entrepreneurs start looking for debt finance?

It is always important to secure capital before you need it.

 

Why? Because securing capital before you need it puts you in a good negotiating position when government departments commence planning at the start of the fiscal year.

 

In addition to that, securing finance before you need it helps you to manage your cash flow through long enterprise sales cycles.

 

After that, towards the end of the fiscal year, government departments work hard to spend remaining budgets. So securing finance before you need it ensures you can capitalise on event-driven opportunities. 

 

Moreover, securing finance before you need it helps you to 

avoid problems associated with external pressures such as political and economic changes.

 

5. What experience do you have in GovTech/B2G? 

Before setting up Fuse Three, I, along with my co-founder Russell successfully built and sold a B2G energy efficiency company.

 

In doing so, we secured contracts with government departments at various levels, including local and central government and government agencies.

 

Of these included delivering energy efficiency programmes and software to the NHS, universities, police, Department for Education, local councils and the Home Office.

 

6. How do you see the GovTech/B2G market growing in the coming years?

Despite the challenges of running a GovTech business, we see enormous opportunities for entrepreneurs involved in HealthTech, Cyber Security, HR Tech, Cloud Computing, FinTech and Enterprise Software.

 

I read a statistic recently that told me spending on GovTech in Europe is €21.8bn, and that could grow five-times over in the years to come. 

 

7. How do you typically support your clients?

GovTech companies talk to us when they need funds to support them through enterprise sales cycles — also, growth finance, M&A finance and funds to enable international expansion.

 

You see, private debt finance specifically caters to the needs of GovTech companies, without diluting the equity of founders and existing investors.

 

8. Who makes up your GovTech client base?

GovTech is an area we know well and in which we have a lot of success. 

 

To secure funding, we can draw on our personal experience of growing a technology business supplying central and local government.

 

We understand our clients’ challenges. What’s more, we know the funders that want to lend into this space.

 

At present, our client base includes companies operating in HealthTech, Cybersecurity, Data Centres, Enterprise Software, Cloud computing and software development, and VAR’s.

 

For these companies, we have sourced, structured and negotiated loans including venture debt, IP secured lending, mezzanine finance, growth loans, acquisition facilities, bridge finance and shareholder buy-backs.

 

9. Do you see many UK focused B2G companies expanding internationally?

Yes. Upon successful contract completion, B2G companies often decide to replicate their success internationally.

 

To date, Fuse Three has funded international expansion projects in Asia, the US, Australia and the Middle East.

 

Where can people find you, Ifti?

 

You can connect with me on LinkedIn at: https://www.linkedin.com/in/ifti-akbar-7532014/ 

 

And finally

If you would like help smoothing your GovTech company’s cash flow peaks and troughs, also managing your investor’s expectations, then do get in touch. You’d be surprised by how easy it is to secure private debt finance.

How we write investment memorandums debt funds actually want to read

So you want to raise money from private debt funds to grow and scale your business?

You worry without existing relationships with private debt funds or indeed lenders in general; you need to attract their attention.

But how much information to give them? You know private debt funds do not have the time to print and pore over 50 pages of company information and financials.

And how to explain the opportunity? You want to give them enough information to make an informed decision.

I’ve been there.

This was the point when I realised the importance of putting time and effort into creating an investment memorandum that’s easy to read, understand and act on.

My experience has taught me that private debt funds welcome clarity and use of plain English. Top of their priorities is getting to grips with the opportunity and understanding what’s in it for them.

Moreover, they want to be able to scan proposals and find answers to pressing questions quickly.

The problem with including weighty information and jargon in any business communication is it:

  • Slows readers down
  • Confuses and leads to misinterpretation
  • Raises questions of camouflage as expectations are neither raised or lowered

In the worst-case scenario, too much information and jargon cause readers to lose interest and drift away.

What it all boils down to is this. To compel a private debt fund to read your investment memorandum you need to:

  • Distil complex financial information
  • Use plain English to get your message across

 

How we write persuasive investment memorandums

We spend a lot of time making sure our investment memorandums:

  • Get to the point
  • Avoid jargon and legalese. We only use words private debt funds understand
  • Give debt funds the relevant information they need to make a decision

 

The first thing to do is to outline the objectives of the finance project. Make it clear how you will use the private debt fund’s money.

After that, include a concise company and market overview. Also, outline the risks, because no one likes surprises.

Beyond that, layout the terms of the investment and most importantly provide a projection of the outcome.

Do this clearly and concisely, and at the same time avoid jargon, and you will find private debt funds will happily take time out to review your opportunity.

Better still, you can expect a fast turnaround of term sheets.

Be warned. If you fill your investment memorandum with jargon, you might attract the wrong type of attention. In a recent article, the FT noted that “Ocado, the UK supermarket delivery company, attracted some online ridicule for this statement that it published with its half-year results:

“Over the last six months, the centre of gravity at Ocado Group has shifted from our heritage as an iconic and much-loved domestic pure-play online grocer to our future as a technology-driven global software and robotics platform business, providing a unique and proprietary end-to-end solution for online grocery, and an innovation factory, applying our technology expertise to adjacent markets and other verticals.”

My point is this. Short, concise sentences are easy to read and encourage readers to glide through documents. Whereas long words, long sentences and long paragraphs intimidate and confuse readers.

It’s pretty obvious once you think about it.

 

And finally

The good news is it doesn’t have to be you who puts together a persuasive investment memorandum. 

If you would like help grabbing a private debt fund’s attention with clear,  concise and relevant words, drop me a line, and we’ll set up a time to chat.

 

Investment memorandum

How leveraging debt can benefit a tech business

At what stage in a business lifecycle can you take on debt?

Companies at all stages in their life cycles take on debt. But there’s a distinction between how growing and mature businesses use it.

Mature businesses have mostly left behind significant capital expenditure. What’s more, they’re likely to operate in mature and stable markets. 

At this stage in their life cycles, mature companies have complex capital structures. So they will use debt to adjust their capital structure, pay off shareholders, refinance expiring facilities and even fund an IPO.

Whereas, for smaller, yet fast-growing companies, the critical consideration is not running out of cash, which can be fatal. So they’ll use debt finance to fund:

  • Growth
  • Expansion
  • Equipment purchases and staff to help them to scale up
  • A bridge to the next funding round

 

What is debt leverage?

When a company leverages debt, it uses borrowed capital to make a purchase or to invest in a project to enable rapid growth. 

 

Why is it essential to understand debt leveraging?

Smart financial management is the cornerstone of every successful business.

When making financial decisions, CEOs and CFOs should aim for an optimal capital structure to ensure the most flexible funding at the lowest cost.

 

How is debt leverage measured?

High street lenders and alternative financiers use several different financial ratios, including an aptly named ‘debt leverage ratio’  to measure debt leverage. 

The use of financial ratios largely depends on the size of your business and for what the loan is needed. 

For this reason, venture debt providers have a very different outlook on leverage to that of a high street bank.

 

What does it mean if your company is over-leveraged?

When you do not  have sufficient cash flow to pay the interest on your debt and reimburse the lender, your company is considered over-leveraged. 

 

What are the causes of over-leveraging debt?

 As well as taking on too much debt, a company can become over-leveraged if other factors have transpired against it. 

For example, a drop in revenue or profit can result in you having too much debt at a specific time.

 

How can a tech company avoid being over-leveraged?

The best starting point is common sense.  

Ask yourself a series of ‘what if’ questions to arrive at a judgement.  You can then use excel models, financial analysis, ratios and a whole plethora of other tools to help you with your decision making.

 

 What are the effects of over-leveraging debt?

 First off, you risk breaching existing loan covenants. 

Then and most importantly, unsuitable debt facilities with high repayments can impact available cash flow and put you at risk of insolvency.

 

What are the warning signals that a company might be over-leveraged?

In addition to keeping a close eye on your ratios, warning signals include not achieving sales or cost plans. 

 

If you think you might be over-leveraged, what should you do?

Don’t ignore the warning signals. Keep calm under pressure and take urgent action to reduce the debt, such as increasing sales or reducing costs. 

Be aware that solving problems takes a lot longer than you think. 

How does debt affect the value of a company?

Taking on debt does not affect the value of a business. 

But it goes without saying lenders and investors see over-leveraging as a red flag.  

 

A bank lender uses assets to manage loan risk. How do private debt financiers manage risk?

Alternative financiers, including private debt funds, use IP assets or recurring cash flows as leverage when structuring debt finance facilities.

Sometimes, they’ll have a plan ‘b’ in mind when they lend.

To illustrate, a traditional venture debt lender would get comfort from (but not rely on) a company’s VC investment to support a company through tough times.

 

Where should tech companies seek advice about raising debt?

 

A specialist debt advisor objectively analyses situations and needs. 

Consequently, it can work out what the role of debt in the capital structure means for both the borrower and the lender.

 

To sum up

 

Taking on debt doesn’t mean you have to push boundaries. 

Debt is simply another tool in your financial toolbox.

Indeed, when used correctly leveraging debt can help your tech business to grow and provide value to the marketplace.

What could be more important?

 

And finally

If you’d like advice about leveraging debt to fuel your tech business’s 

growth, drop me a line, and we’ll set up a time to chat.

London Tech Week: Capital Raising Takeaways

Last week London hosted its 6th London Tech Week. Here, the great and the good in tech converged to listen to 600 speakers celebrate and learn about the best of tech.

 

What we learnt about the UK tech sector:

  • ‘The UK has created more unicorn tech companies, firms valued at more than 1 billion US dollars, than any other country except for the US and China’ (Tech Nation and Dealroom).
  • ‘More than a third of Europe’s fastest-growing tech companies are now based in Britain, following 35 billion US dollars (£27 billion of investment in the British tech sector between 2013 and 2018.’
  • ‘Outside of the capital, the UK has six cities which are home to at least two tech unicorns – Cambridge, Oxford, Manchester, Leeds, Bristol and Edinburgh.’
  • ‘British Tech is growing over one-and-a-half times faster than the rest of the economy, adding more than £130 billion to our economy every year.’ (PM Theresa May)

 

But that’s not all. We also learnt that capital raising is a big issue for tech businesses. In a sellout session, international law firm Memery Crystal LLP answered delegates questions about key considerations management should take into account right from Series A funding through to IPO’ing.

It got me thinking about why tech companies should also consider raising debt, in particular, venture debt as part of their capital structures.

You see, Venture debt was born in Silicon Valley and is a type of debt financing suited to tech companies that lack the assets or cash flow for traditional debt financing.

More and more tech companies have come to realise the benefit of venture debt because:

 

Capital Raising

When capital raising venture debt reduces dilution

With equity financing, you sell shares in your company to raise money. In return, you have no repayment obligation.

In contrast, when you raise debt, you borrow cash from a lender at a fixed rate of interest and with a predetermined maturity date.

The advantage is you keep control and ownership of your company. Moreover, once you pay back your loan, your liability comes to an end.

 

When capital raising venture debt is cheaper than equity

The cost of debt is finite. By this, I mean once you’ve paid it off you have no further obligations.

As such, for tech companies with a sound growth plan, that expect to perform well, debt is cheaper than equity.

When capital raising venture debt is quick to set up and takes the pressure off fundraising

You can set up a venture debt facility in a month, whereas it can take six months to secure equity finance. Using venture debt takes the pressure off and gives companies the bridge they need to get to the next funding milestones. In fact, you can use venture debt to delay taking equity funding until you achieve a higher valuation.

 

In uncertain times when it is hard to generate capital from public markets, then venture debt can provide the solution

If your company relies on investment capital to finance time-sensitive events such as a roll up strategy or cross border expansion, then periods of uncertainty in the financial markets add to completion risk.

 

Equity financiers welcome venture debt as part of the capital structure

Leveraging a certain amount of debt can enhance an equity provider’s investment returns. As long as a company is working to a strong growth plan and using debt doesn’t threaten its financial soundness during the peaks and troughs of its growth, then equity lenders welcome it.

 

So it all adds up to this

London Tech Week taught me that capital raising is an important issue for tech businesses.

To raise capital, tech companies have two options, debt or equity.

While traditional debt finance may be out of reach to tech companies with little in the way of assets or cash flow, venture debt can provide the solution.

Venture debt is:

  • Cheaper than equity
  • Reduces dilution
  • Is quick to set up so is ideal for providing a cash runway to achieve milestones
  • Takes the pressure off fundraising
  • Provides a solution in times of uncertainty in the financial markets
  • Is welcomed by VCs and PE firms as a complement to equity

 

What could be better?

If you’d like to discuss options for capital raising, drop me a line, and we’ll set up a time to chat.

How to use venture debt to achieve profitability

You already know to get the funds you need to move your high growth yet cash burning tech company out of negative cash flow and into profitability you have a choice between debt and equity. Or a mixture of both.

Be that as it may, you worry about the options available to you.

In particular, you worry about diluting ownership and control of your business if you follow the equity route.

Conversely, you worry your lack of positive cash flow, significant assets to use as collateral and credit history makes you unattractive to conventional debt lenders.

Here’s the thing. Without capital to supplement equity, you won’t have the cash you need to get you to the next funding milestone.

Equally important, you won’t have a cushion to protect your company if something goes wrong.

Here’s where venture debt, a source of capital specifically tailored to meet the needs of high growth tech businesses, can help you in your transition to profitability.

 

 

What is venture debt?

Venture debt is a term loan. It is structured to provide your company with growth capital you can draw on as and when you need it.

Typical uses for venture debt include:

  • Raising capital for an event-driven need such as an acquisition without diluting equity
  • Funding working capital requirements during high growth periods
  • Extending a cash runway to get a company in a highly favourable position for their next round of funding

In some situations venture debt can also be used to protect a company from a down round resulting from situations such as a delay in releasing products, or customers signing up.

 

How can venture debt help companies achieve profitability?

No matter what money you have coming into your company in the future, you still need cash to get you from A to B.

Venture debt provides capital to get companies through critical periods of growth and cash burn.

Leverage venture debt strategically, and you’ll not only have operating capital, but also you can eliminate or delay a last round of equity. As a result, employees and early investors benefit from reduced equity dilution.

 

What companies are best suited to using venture debt?

Using venture debt to achieve profitability

 

As with any debt finance facility, ultimately your company needs to pay back the loan.

For this reason, venture debt is best suited to mid-stage bootstrapped or Series A or Series B startups, that can demonstrate:

  • A clear operating plan including a strategy for how you’ll use the loan for growth
  • Recurring revenue streams
  • High revenue growth
  • An enterprise/B2B customer base
  • Control over burn rate
  • Strong VC backing
  • Additional company value in the form of intangible assets such as IP
  • A management team with a good track record

 

When is venture debt not suitable?

Venture debt is not suitable for companies without cash resources, and those seeking funding as a last resort.

Your debt repayments should not account for more than 20 per cent of your operating expenses.

 

When is the best time to take venture debt?

Companies that benefit most from venture debt supplement each equity round with a smaller round of venture debt.

By assuming this strategy, they get capital to see them through event-driven needs. Plus they get a runway to get them to the next funding round.

More importantly, they reduce dilution by reducing the amount of equity they need.

 

Sounds great. Where can you access venture debt?

There are many venture debt providers on the market. By all means, you can seek out and talk to each one individually.

But you’ll save a lot of time and money by talking to a venture debt advisory and brokerage firm. One that can help you to search the market and compare the different venture debt deals available to you.

This legwork will save you the overall cost of your capital. What could be more important?

 

And finally

If you’d like help getting venture debt finance to help your tech company transition to profitability, drop me a line about debt advisory and brokerage services, and we’ll set up a time to chat.

How does venture debt financing work? A simple guide

Want to know more about venture debt financing?

Keep reading this guide, and you’ll find out exactly how venture debt can get your SME tech business to the next growth stage without diluting your equity or restricting you with loan covenants.

In particular you’ll learn:

  • What the term venture debt means
  • Why SME tech businesses use venture debt products
  • For what you can use venture debt
  • How venture debt differs from conventional debt finance
  • Why venture debt is a desired source of finance for growth stage tech companies
  • Why companies prefer debt over equity
  • What is cheaper, debt or equity?
  • Using venture debt for cross border transactions
  • Where you can find venture debt funders

Let’s get started:

A simple guide to venture debt financing

What does the term ‘venture debt’ mean?

Venture debt is a form of debt financing specifically designed to meet the needs of startup and pre-profit, high growth tech companies.

You can access venture debt as a stand-alone product or take it in complement to equity financing.

Often referred to as ‘risk capital,’ companies that use venture debt do so because they tend to lack tangible assets to use as collateral.

 

Is venture debt a short term loan?

A venture debt facility is typically structured over four years.  As a venture debt loan recipient, you can either service the debt and repay the full amount at the end of your loan period, or set up structured repayments.

 

Why would an SME tech business use a venture debt product?

If you’re a high growth tech business focusing on return on investment over the long term as opposed to short term cash flows and therefore prioritising growth over profit, then you need flexible growth capital to see you through to profitability.

 

For what can you use venture debt?

Venture debt fills in financing gaps when an SME tech business needs to:

  • Extend its cash runway
  • Manage a delay in releasing products
  • As a supplement to equity financing

 

How does venture debt differ from traditional debt financing?

First off, Venture debt funds often sit outside of the traditional bank ecosystem.

Independence and sector focus means venture debt funds can be responsive to the needs of early-stage growth companies.

Then there’s the source of the capital. Investors often include second-time entrepreneurs, keen to lend a hand to those following in their footsteps.

They’re comfortable that with the right finance, tech companies can navigate volatile periods and gain strength and stability.

Beyond that, it’s how venture debt investors look at loans.

Traditional bank lenders use a company’s track record of profitability and creditworthiness as underwriting criteria.

Whereas debt funds look for evidence that companies can repay loans from future equity and enterprise value (customer base, licenses etc.)

 

Why is venture debt becoming a desired source of finance for growth stage tech companies?

Despite your potential for scaling and making big profits, in the early years, bank lenders expect you to rack up losses. Consequently, they see you as a risk.

As a result, you can expect bank debt loans to come with restrictive covenants and demands for personal guarantees from board members and major shareholders.

In comparison, venture debt is covenant light.

What’s more, venture debt lenders can leverage intellectual property to raise funds.

Consequently, venture debt is ideal for filling the funding gap between equity rounds. And buying the time you need to reach milestones.

By the same token taking on venture debt decreases the need for follow-on funding.

And if that’s not enough, venture debt investors do not seek control of your business.

 

Why do companies prefer debt over equity?

Most attractive to board members is the fact that debt minimises equity dilution.

Then, it has an advantage as you can set it up quickly.

 

What is cheaper, debt or equity?

Debt is cheaper than equity, as lenders secure finance on assets.

Whereas, equity lives and dies with your company. Therefore equity investment is seen as a higher risk and more expensive.

Also, until you draw down funds, debt finance costs are limited.

 

Can you transact cross border venture debt?

Until recently, the finance sector has struggled to keep pace with Europe’s cross border culture.

Fortunately, venture debt fills the financing gap when scale-up companies want to sell into international markets.

As a result, venture debt has paved the way for a new market of cross-border facilities, offered alongside equity sponsored financing.

 

Where can you find venture debt funders?

Venture debt is available from specialist banks and private debt funds, globally.

In fact, Fuse Three works with funds across Europe, the US and Asia Pacific.

 

In short

If you’re a high growth company prioritising growth over profit, moreover, a company that needs time to reach your milestones. Also, a company that needs a healthy valuation to attract new investors for your next fundraising round, then consider venture debt as part of your capital stack.

The good news is it doesn’t have to be you who has to find the right venture debt partner to bring value to your business.

This calls for a debt fund broker.  

Find out more.