Venture Debt
What is Venture Debt?
Venture debt falls into the broad spectrum of Private Credit. Having said that, we feel that businesses that tend to be in the Private Credit pool are, on the whole, established, profitable businesses whereas those that qualify for venture debt form an interesting subset, notably, venture backed, loss making, high growth and capital intensive businesses. As such, we have a team dedicated solely to assisting with deployment of the venture debt product.
Venture debt is debt that takes the place of, or complements equity in a fundraise, preventing additional dilution for management and institutional investors. Most venture debt takes the form of a growth capital loan, usually over 3-5 years and usually with some flexibility on terms (such as interest only for 6-12 months) so that the business can utilise the capital and only start repaying in earnest as the growth trajectory is achieved.
Who is it suitable for?
Venture Debt is a different beast to most of the other products FBX cover, in so much as Venture Debt lenders are happy to look at capital intensive businesses that are targeting ‘hockey stick’ type growth.
This does not mean that a fresh software start-up will be able to raise venture debt, lenders would still predominantly be looking at ‘established’ businesses, but established might not mean multiple years of sustained profitability but instead, it may mean that subscriptions or users has started to roll in, fundraises have been achieved and support from investors is strong.
Venture debt can also be used for M&A transactions, particularly in instances where businesses are adding on different products, jurisdictions, or technical innovation.
As an example, an established business may be acquiring a capital intensive tech platform, that will need capital to both complete the transaction and then further capital to get the synergies working, thereafter there is clear fast growth and economies of scale. These types of deals, venture debt providers will be very suitable for.
In terms of affordability, then naturally a lender will look at profitability first up, but with venture debt if there is no profitability then the concept of ‘runway’ (how many more months/years’ worth of cash does the business have left?) and then the strength of the support from the equity investors. Both of these will be key factors in the underwrite, so businesses will need to be profitable, have a good runway and supportive investors to be suitable for venture debt.
What is the process?
Venture debt lenders will take a very similar view of a business as a venture capital equity provider might. As such, the process is not wholly simple nor is it particularly timely. This will take 4-12 weeks from engagement to pay out.
There are not hundreds of Venture Debt lenders, but for suitable businesses, there should be appetite from multiple lenders, so the first part of the process is a ‘roadshow’ process, where businesses and lenders will scope each other out. From there, similar to other forms of private credit, it is negotiation of terms, dd, legals and pay out. Depending on complexity of the transaction, this can take 4-12 weeks. Exploring options is the first port of call, so feel free to get in touch with us for a quick chat.
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