A SMART COMPLEMENT TO EQUITY FINANCING
WHAT IS VENTURE DEBT?
Venture debt, also known as venture lending, refers to a variety of debt financing products offered to early and growth-stage venture capital-backed companies. Provided by technology banks and dedicated venture debt funds, venture debt generally consists of a three to four-year term loan or equipment lease.
When structured appropriately, venture debt can be an attractive financing option for the following reasons:
- It results in less equity dilution for entrepreneurs and investors.
- It does not require a valuation to be set for the business.
- Venture lenders do not require board seats.
- The due diligence process is typically less exhaustive compared to equity.
Trinity Capital Investment is a leading provider of venture debt financing and has produced a short video, The Value of Venture Debt Explained, to help illustrate the value of venture debt to startup companies and their venture capital investors.Watch YouTube Video
BENEFITS OF VENTURE DEBT
FUEL GROWTHProvide growth capital with minimal equity dilution
EXTEND RUNWAYExtend cash runway to achieve the next milestone
INCREASE Bridges to next round of financing at a higher valuation
ENHANCE Strengthens balance sheet and enhances liquidity
STRUCTURED Achieves a more balanced and less costly capital structure
SUBORDINATED Can be subordinated with senior bank debt
Trinity’s growth capital was a smart debt option for us. In addition to minimizing equity dilution, the process was easier and materially less complicated than equity financings I have experienced in the past. We are looking forward to having Trinity as a valued financial partner.Andy Greenawalt, Founder & CEO Continuity
When to Raise Venture Debt?
There are several situations where venture debt is a smart financing option for entrepreneurs and their venture capital investors.
With Equity Raise
The best time to raise venture debt is concurrent with or immediately following an equity raise. Momentum is strong, diligence materials are in-hand, and cash is in the bank. Venture debt can augment a portion of the equity need and minimize equity dilution.
Between Equity Rounds
Venture debt can extend the cash runway of a startup company to achieve the next milestone achievement prior to their next equity raise, resulting in a higher valuation and less equity dilution.
Fund Large Capital Expenditures
Venture debt can help finance large capital expenditures without depleting the company’s cash balance. Equipment leases can provide “just in time” financing to purchase assets as they are needed, and spread the payments out over a three to four-year period.
As an Insurance Policy
Venture debt can serve as an insurance policy to protect the company from potential mishaps or delays, thus eliminating the need for an emergency bridge round (or penalizing down round) and allowing the company to raise its next equity round once the company is back on track.
Fund to Profitability
Venture debt can bridge a company to profitability. This is a great use of debt as it propels the company forward during a critical period of growth and can completely eliminate the need for a final round of equity financing.
Trinity Capital Investment published a white paper, Smart Financing: The Value of Venture Debt Explained, to illustrate the most compelling benefit of venture debt financing. The paper quantifies the value of venture debt by calculating the percentage of ownership saved for entrepreneurs and investors by combining venture debt with venture capital.Download White Paper
Important Venture Debt Terms
Below are some important venture debt terms for companies considering raising venture debt.
- The loan size should be determined by the amount of capital required and the amount of debt desired by the business.
- The loan duration, or term, typically consists of 24-48 months and often includes an interest-only period followed by an amortization period (which consists of principal and interest payments).
- The interest rate, also referred to as the run rate, will determine the payments for the interest-only and amortization periods. Banks have a lower cost of capital and therefore provide lower rates than venture debt funds.
- The final payment (loan) or option to purchase (lease) should be taken into account as well as any fees during the application, legal or closing process.
- Many venture lenders request warrants to purchase company stock, typically calculated as a percentage of the loan amount.
- Any covenants (financial or non-financial) which could trigger a default should be carefully considered. Venture debt funds typically provide more flexible capital with less covenants than commercial banks.
- Collateral will be pledged as a security for repayment of the loan, and can include cash, inventory, company assets, or intellectual property.
All of these factors should be weighed against other financing alternatives available to the company when considering venture debt.
Choosing a Venture Lender
When choosing a venture lender, it is important to select the overall best financing partner. Below are some key characteristics to look for.
We encourage companies to conduct customer reference calls prior to selecting a venture lender to understand how each lender acts in good times as well as when things don’t go according to plan.
We encourage companies to get the best terms they can, but more importantly, to choose the best partner. We also recommend viewing each financing option as a single solution, even if comprised of multiple financing vehicles, and comparing holistically with other financing alternatives.
Timely & Dependable Funding
Raising capital can be a distraction from the business. Choosing a lender with a reputation for running an efficient process, funding on time, and per the agreed upon terms, can save a lot of headache, especially in timely situations.
After the transaction is closed, the lender will request regular financial updates and the company will have timely requests as well (consents, subordination agreements, etc.). It is important to select a lender that will be a good financial partner over the course of the loan.
Trinity Capital Investment
The Partner of Choice for Venture-Backed Startups
We are building a team and a culture here at Trinity that aims to be the very best venture debt lender in the United States. In addition to requisite highly trained finance personnel, we have on staff:
- 3 electrical engineers with 80+ years of high-tech experience, 75+ issued U.S. patents, and 100+ worldwide
- 10 associates with startup experience including CEO, COO, CFO, VP Engineering, Sales, & Marketing
The Trinity Advantage
Expertise spanning venture finance, equity, operations and IP across a wide range of industries
- We understand and address your specific needs with a creative financing solution
- We assign a dedicated expert to work with you at each stage of the process
- We leverage our experience and network relationships to help you succeed
- We are a lender with a reputation for helping out when things don’t go according to plan
- Our process is streamlined and efficient – you know exactly what to expect
- You are a priority – typical 24-hour turnaround on any customer request or email
Our portfolio management sets Trinity apart from other venture lenders. Upon close of funding, we work closely with our customers to provide value throughout the relationship. If things don’t go according to plan, we are known to jump in a help out.
We have helped companies obtain additional equity and debt financing, fill executive management positions, and meet strategic partners. Everyone says they’re more than money, but not everyone backs is up.
It’s not how you act on your best day, but how you react on your worst day that defines a relationship or partnership.Steve Brown, Managing Partner Trinity Capital Investment