Venture debt is a form of debt financing for venture capital-backed companies that is complementary to equity financing. The debt is typically structured as senior debt with tenors of up to three years, with monthly repayment structures that include a fixed coupon and some equity kickers. Venture debt involves significantly less dilution compared to equity for the founding team and investors. It also helps stakeholders improve the returns on their equity ownership. Venture debt funds typically work closely with venture capital investors and management teams as a differentiated capital partner to a company.

The additional capital from venture debt can help companies make more substantive progress towards achieving milestones ahead of their next funding round. It can also help increase the cash runway of a business, or act as an additional capital buffer to manage business or market uncertainties. These benefits significantly help improve the odds of growing enterprise value for a company in preparation for its next funding round. Additionally, this boost to enterprise value also comes with savings in dilution, which would otherwise have been incurred had the additional capital been raised as equity. Thus, venture debt fundamentally helps make venture equity more efficient, and boosts venture returns, with greater savings in dilution and increased future enterprise value to both founders, employees and early-stage investors.

As a start-up, you should consider venture debt when you are:

In the process of raising or have recently closed an equity financing round from a reputed venture capital fund who can provide a strong layer of patient capital beneath the debt
Looking to add incremental capital to accelerate growth without taking on more equity
Looking to fund capital expenditures or have large investments to make in your business beyond what your equity alone will support
Looking for additional capital to expand beyond the core business into new markets/products/businesses, but this amount is too small for a full equity fundraise
Considering a buyout or an acquisition
Looking to add additional capital to act as a contingency buffer
Looking to increase the cash runway of the business following an equity round

Venture debt funds assess the medium-term growth and stability of enterprise value of a business, and the likelihood of the company successfully raising further capital on the back of this growth. Accordingly, the following are factors important to venture debt funds:

Backing by a reputed venture capital fund
Overall liquidity of at least $3mn
Cash runway of at least one year
Comfort and relationship with founders and management
Non-binary business models, typically post product-market fit
Strong enterprise value
Future fundraising plans

It is important to remember that venture debt is complementary to equity and is not a substitute for equity. Taking on debt without sufficient liquidity, good visibility on business growth and the next funding round, as well as the support of investors poses high risks to founders and companies. Accordingly, venture debt is not advised in the following scenarios:

Low cash balance and short runway (less than 12 months)
Debt service amounts to more than 20% of company’s operating expenses.
Business model faces binary, existential risks or is pre-product market fit.
Equity investors are not supportive of the business or tapped out and unwilling/unable to invest additional amounts to support further growth.

In general, a business with strong positive cash flows and stable, highly acceptable receivables/assets should approach a bank or other traditional financial institution as these sources are far cheaper and more scalable than venture debt. In some situations, however, these flows and assets may not provide sufficient comfort to traditional lenders to extend large-term debt/growth capital facilities to companies, or the terms of such facilities may be very onerous on a company. In such cases, it is worth exploring venture debt as a more flexible and available option, which takes higher risk for higher return. Such growth capital can be useful in growing enterprise value ahead of a larger fundraise, as it lets founders capitalize on their positive cash flows to increase enterprise value.

Alteria can invest in companies as early as Series A and stay relevant as a meaningful debt provider even past Series D. We are a sector-agnostic fund and are happy to explore companies across the spectrum of markets and business models. We have been active investors in segments such as e-commerce, fintech, consumer brands, edtech, healthcare, and enterprise software among others.

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