Debt and alternative financing
What is venture debt and who qualifies for it?
Short answer
Venture debt is a loan made to a venture-backed company, usually alongside or after an equity round. Lenders tend to approve startups that already have institutional investors, real revenue or a clear path to it, and a plan to repay. Terms vary a lot by lender. Many founders talk to an attorney before they sign any offer.
Venture debt is a loan to a young company that is already backed by venture investors. It is not a replacement for equity. It usually sits next to it. A lender advances money, the company pays interest, and the lender often asks for some extra upside such as warrants. That is the general picture, and each lender sets its own terms.
Who lenders tend to say yes to
Lenders generally want to see that someone else has already put real money in. They look for a recent equity round, credible investors, revenue or a visible path to revenue, and cash flow that can cover repayment. A company with no backers and no track record is a hard fit. I would not promise anyone they qualify. Each lender decides for itself, and many founders talk to an attorney about any term sheet.
In the videos I have on this topic, nobody walks through venture debt by name. What they do show is how debt works in practice, and that is useful to anyone considering it.
A physician guest explains how notes helped bridge a $20 million debt facility, and why his earlier debt fund failed.
That guest said they put about $1.1 million in notes over three months to bridge a $20 million debt facility that was about to close. They also said a debt syndication they put together around 2008 and 2009 raised only $25,000. The projections made sense. The investors just wanted equity.
Debt is only one of several structures
When you ask who qualifies for debt, you also have to ask who wants to fund it. Some investors want income and some want equity. It helps to match the structure to the investor.
In this webinar I explain why having several investment structures ready, including debt and income, keeps conversations moving.
I told that audience that if investors keep asking for income or faster liquidity, you can build a structure that gives them that. You can still keep more of the equity in your best deals. Having debt, income and preferred income in your back pocket lets you respond when an investor says they do not like your first structure.
What debt investors say they like
I interviewed a multi-family office that had spent almost five years focused on real estate debt. They described loan to value ranging from 60 to 80 percent, short duration and good cash flow. They said they do not underwrite the loans themselves. They look for good lenders to partner with.
A multi-family office investor explains why real estate debt became their focus.
"Lending and anything that's income with high-quality collateral behind it is of general interest when you're late in the cycle, but also of general interest all the time, honestly."
That is real estate lending and not venture debt. Venture loans are usually backed by a company's prospects more than by a building. Still, the lesson carries over. Debt capital cares about repayment and protection. If you want to borrow, show the repayment plan first.
More from my talks
One reason investors like debt is that it can give equity-like returns with the protection of debt. I have seen a group sell debt notes to investors on a five year term paying 12%. The collateral was a holding company that already produced tens of millions of EBITDA. The investor got paid for waiting, and the borrower used the money to buy majority stakes in companies. If you are a founder asking for a loan, think about what a lender can point to as protection. Strong collateral or cash flow makes the answer much easier.
"So it's awesome to see, the comment about credit being popular is you can get equity like returns, but with the protection of debt."
"Another group uses debt notes with investors with a five year term and gets a 12% return. They go and acquire majority equity stakes in companies. As those debt notes get paid off, they're left owning all the equity in the company. The investor got a 12% return on their money and the collateral was the holding company that already was producing tens of millions of EBITDA."
Facts and figures
- One podcast guest put about $1.1 million in notes over three months to bridge a $20 million debt facility set to close at month end.
- The same guest's debt syndication around 2008 and 2009 raised only $25,000 because investors wanted equity.
- A multi-family office described real estate debt with loan to value ranging from 60 to 80 percent.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: Top 3 Insights on Structuring Investments - PODCAST - Family Offices & Family Office Club, New York City $1B+ Multi-Family Office Investor Mandate Interview on Private Equity, Real Estate,..., 7 Strategies to Leverage Our Investor Club and Raise More Capital (Webinar Recording). Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around venture debt terms, warrants and covenants and offering documents. Do not use AI to write your own legal agreements.
Your next steps
- 1Write down your last equity round, your investors, your revenue and your monthly cash burn.
- 2List which lenders work with companies at your stage and ask what they require.
- 3Consider talking to an attorney about any term sheet, including warrants and covenants.
- 4Decide whether your investors want debt, income or equity before you pitch.
- 5Keep a second structure ready in case the first one does not fit.
More questions on this
Is venture debt the same as a bank loan?
No. Banks usually lend against assets or steady cash flow. Venture lenders tend to look at the backing and growth of a young company. The terms and any warrants differ by lender.
Can a company without venture backing get it?
It is harder. Lenders generally want evidence that outside investors have already committed capital. Ask lenders directly what they require and consider talking to an attorney.
Should I raise debt or equity first?
That depends on your investors and your cash flow. I tell founders to find out what their investors want to buy, then structure around it. Many founders talk to a securities attorney about the plan.
Related questions
- How do I raise private credit for my business?Start by deciding which side of private credit you need.
- How does asset-based lending work for growing companies?Asset-based lending is a loan secured by company assets such as receivables, inventory or equipment.
- How does a bridge loan work for a real estate deal?A bridge loan is short-term money that covers a gap in a real estate deal.
- What is mezzanine financing and when should I use it?Many sponsors look at mezzanine financing when senior debt does not cover the whole gap and they want to avoid selling more equity.
Work through it with the family office fit check. See all debt and alternative financing resources.