Venture Debt | Aug 18 2020
What is the difference between venture debt and venture capital?
We often get asked what is the difference between venture debt and venture capital by our clients. 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.
As with all debt of any kind, debt has to be repaid, and while a VC is giving money in return for a stake in the equity, they too expect to make their money back in profits and shares, so in reality, they both want their money back, but one takes a stake in the company and other does not.
What does Venture Debt do?
Venture debt is really the ideal option for companies that are considered ‘mature’, by this we mean – you’re a fast growing, scalable business:
- 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. And you didn’t give away your precious equity in the process.
The big advantages of venture debt is its usually less costly than equity and the owner doesn’t have to personally 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.”
Uses for Venture Debt
You might wonder how to use venture debt in your company. Here are some of the ways companies we talk to use it:
- Growth – acquire new customers, product roadmap, enter new regions etc
- Acquisition – buy a competitor, partner or technology
- Share buy back – 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
Fuse Capital Tips to check if you’re ‘funding ready’:
- Seek money when you don’t need it
- Pipeline, Pipeline, Pipeline
- Assemble the perfect team
What does Venture Capital do?
On the other hand, venture capital is invested in immature startups to help them achieve milestones that are critical for the development of the company and integral to increasing its value.
Entrepreneurs favour this route, by issuing stock in the company in return for investment to get them over the line. Those companies look like this:
- Their cash flow is weak and unpredictable
- They don’t have a meaningful brand recognition
- They’re young and don’t have the ability to pay back a loan
To sum up the difference between Venture Debt and Venture Capital
In short, venture debt is for mature companies turning a steady and regular profit, it gives them the ability to move the company into the next phase without impeding the capital.
Whereas, the step-brother, venture capital is there to take risks on immature companies projecting valuations in the millions. They gamble on the figures and in return take a stake in equity as their form of payback.