With so much news in the press surrounding companies raising millions in venture capital, it’s easy to forget about another well-regarded type of funding called venture debt.
So if you’re wondering who wins in the capital clash between Venture Capital VS Venture Debt, read on and find out.
In its simplest form, both lenders want their money back, but one takes a stake in the company and the other does not.‘ If you want to understand the differences between Venture Debt and Venture Capital, read on.
What does Venture Debt do?
Venture debt is the ideal option for companies who are considered ‘mature’, by this we mean – you’re a fast-growing, scalable business with a proven product or service:
- Your cash flow is strong and predictable
- You have long-standing credibility with client and customers
- You have no desire to hand over any more equity to outsiders
The way venture debt works is that there is an agreed interest period, where you only have to repay the interest per month, once that matures, you’ll start to repay the debt.
Given that your company has a strong and predictable cash flow with a long line of customers, by the time you get to the date of repaying the actual loan, your company will have grown and will have the resources required to repay. Plus, you didn’t give away any more of your precious equity in the process.
Advantages of Venture Debt
The big advantage of venture debt it is less costly than equity and the owner doesn’t have to guarantee personal assets. Jay Acunzo, editor of the ‘nextview blog’ says.
“What makes venture debt unique is that its emphasis isn’t merely on assets or numbers—it’s often about relationships.”
How to Use Venture Debt
You may wonder how businesses use venture debt loans so, here are some of the common uses:
Growth – acquire new customers, product roadmap, enter new regions
Acquisition – buy a competitor, partner, or complimentary technology
Share buyback – buy out early investors before the valuation accelerates
Cash out – take cash off the table to realise some value
Bridge – if you are VC backed, bridge to the next round
What does Venture Capital do?
On the other hand, venture capital invests in immature start ups to help them achieve critical milestones which are integral to increasing the companies value.
In return for investment, entrepreneurs issue them stock in the company to get them over the line. Companies who take Ventur Capital often look like this:
- Their cash flow is weak and unpredictable
- They don’t have a meaningful brand recognition
- They’re young and can’t pay back a loan
How to Use Venture Capital
There are several advantages to taking Venture Capital. The first being expertise and guidance from your VC. You can bet they’ve dealt with a multitude of businesses like yours and can face complex challenges with confidence. This is especially valuable for a young, expanding business experiencing growing pains.
The next advantage is their connections. Your highly connected VC will introduce you to new people and new opportunities, an essential ingredient for building towards success.
Lastly, another prop in a VC’s closet is their expertise in law and tax. Another specialist area which with the right knowledge, can propel growth and success.
Uses of Venture Capital
Although challenging, these common business milestones are understood by VCs. These Use of Funds are what Venture Capital is made for.
#1 Seed Stage – At this stage, the company is at a very early stage, this may be when the company is planning on a hard launch for a product and needs capital to drive it.
#2 Startup Stage – This stage requires a larger amount of capital to aid advertising and marketing of new products or services to new customers, this is the customer acquisition stage which is vital to any new venture.
#3 First Stage – The company is starting to look at expansion and further customer acquisition, this requires a higher amount of capital than the previous stages.
#4 Expansion Stage – This is when the company’s product is starting to become more mature and they have the assets and reputation to be able to expand, whether this is opening new offices, launching a new product.
#5 Bridge Stage – This is the stage where a company decides to transition into a public company. The business has matured, and it requires financing to support acquisitions, mergers, and IPOs.
To sum up the difference between Venture Debt and Venture Capital.
In short, the popular step-brother, venture capital, takes risks on immature companies projecting valuations in the millions. They gamble on the figures and in return take a very healthy stake of equity as their form of payback.
The more mysterious, venture debt, doesn’t support pre-revenue businesses, but unprofitable businesses that are generating revenues of over £1 million (typically post-Series A). You pay interest on the loan to start, and once you’ve achieved your goals, you begin to pay back the debt.
As the quality and quantum of revenues increase, the more you can leverage different debt products and grow your business strategically.