As a result of the coronavirus pandemic, start-ups are seeing revenue and growth rates temporarily lag behind forecasts. As economic activity continues to slow and enterprises cut back on spending, venture debt is becoming increasingly popular as a short-term financing solution for start-ups to quickly and efficiently increase runway and avoid raising equity in poor market conditions at significantly depressed valuations.
Whilst equity will always be the preferred and most common financing option for growth-stage technology start-ups, the non-dilutive properties of venture debt make it an increasingly sought-after financing strategy for entrepreneurs with cash-generating companies, that meet the following key investment criteria;
BUSINESS MODELS – B2B SaaS with recurring contracts from a predominantly blue chip client base
TRACK RECORD – Twelve months trading history with a low customer churn rate and steady revenue growth
FINANCIAL POSITION – Minimum £100k annual revenue with a rational cash burn profile
FUNDING STAGE – Pre-series A with growth capital requirements in the range of £100k-£500k
INVESTMENT USE CASES
Venture debt can be a smart and timely source of capital as it offers a balance between flexibility and dilution and there are a number of situations when venture debt is likely to be a better option than going through an equity fund raising round. While there is no one-size-fits-all approach to venture debt and each transaction will vary on a case-by-case basis, there are three common use cases that demonstrate its benefit;
EXTEND RUNWAY
Achieve the next major value creation milestone and raise equity at a significantly higher valuation in the next equity round
REACH PROFITABILITY
Additional time to increase revenue and reach profitability, rather than raising equity on poor terms and diluting further
PREVENT A BRIDGE ROUND
Benefit from a higher valuation for the next round rather than raising a small equity round from existing investors and signalling distress
INVESTMENT STRUCTURE
Venture debt is an attractive source of risk capital for high-growth companies that lack the assets or cash flow to secure traditional bank financing. Compared to equity, venture debt becomes an increasingly attractive source of capital, allowing businesses to secure additional liquidity and extended runway whilst minimising the negative impact on their cap tables. A typical venture debt deal, at a high level, consists of the following key terms;
INVESTMENT TERM – 18 to 36 months
REPAYMENT SCHEDULE – Monthly
WARRANT COVERAGE – None
INVESTMENT PROCESS – 4 weeks
INVESTMENT SIZE – £200K to £500K
BOARD SEATS – None
ARRANGEMENT FEE – None
PERSONAL GUARANTEES – None
FIND OUT MORE
The flexible properties of venture debt make it an increasingly sought-after financing strategy for entrepreneurs. Contact us to find out more and to arrange a confidential conversation.
