Demystifying Venture debt price
How to understand the cost of a Venture debt transaction (amortization, interests and shares). Put yourself in the lender’s shoes.
I often come across entrepreneurs that find Venture debt expensive. I tend to think that they overestimate their companies (which is probably good) and notably their leverage capacity.
As a loan, Venture debt is often priced at low double-digits or upper single digit interest rates. Taking as an example some of the most relevant Tech companies such as Uber (7.5%), Spotify (5-10%) or AirBnB (10%). I believe that a low double-digit interest rate doesn’t sound expensive for a European Series A/ Series B company.
The main problem for entrepreneurs is to benchmark Venture debt to commercial banks loans or public financing which are generally set at mid-low single digit rates (see Venture Capital-Bank Debt).
As a quick reminder, the asset class of Venture Debt shall be placed somewhere in between the High-Yield Bond and the Venture Capital and therefore the returns expected from taking such a risk are in the range of 10%-25%. Otherwise, investors would rather move their money onto other less-risky and/or more profitable assets.
