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?
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?
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.