Demystifying Venture Debt (A Series)

Note: This is the first in a series of 6 posts on venture debt.

It’s no secret that amazing founders and startups have access to an ample supply of venture capital in today’s market.

Debt is no exception. When used at the right time in an equity-backed business, debt is a great instrument to extend the cash runway of the business towards a better outcome.

Approximately two-thirds of the portfolio companies of a US venture capital firm with $5BN+ AUM have raised venture debt. In Europe, it’s a little over 10% of overall venture funding. Venture debt alongside equity is an option readily available but still underutilized in Europe today.

Although debt has existed as long as venture capital has in Europe (since the late 1990s), there are still common misconceptions about it and in certain geographies, a cultural aversion or ‘guilt’ against using this type of capital.

While many leading American VCs have written on this topic (e.g. Fred Wilson, Tom Tunguz, Brian Feinstein, and Sarah Tavel), what still remains to be addressed is:

How do the business models of a VC and venture debt fund compare?
What is the decision-making framework and actions for European founders?

In a series of posts, I will discuss:

  1. Business model of VCs and venture debt funds
  2. Common use cases of venture debt
  3. Inherent ‘friction’ between founders, VCs, and lenders
  4. Debt structure and terms in Europe, including the ‘make whole provision’ (which tends to be mistakenly ignored during negotiations!)
  5. Key tips to successfully raise venture debt
Before diving into these topics, it’s worth noting that these posts are intended for anyone who is involved with a business which generates negative working capital and has a certain recurring pattern of growth (e.g. SaaS).

If you are the founder of a scale up that fits this criteria, then the first two questions to ask yourself when considering venture debt are:

  1. Is there a buyer today for what the business is supposedly worth?
  2. Does the business have sufficient cash flow to pay the on-going cost of borrowed money (commonly structured as monthly payments over a 3-year period)?

Of course, not easy questions to answer when startup life varies day-to-day. However, I hope after reading these posts that you will have the knowledge and tools to secure debt financing for when the right time comes.

(Full disclosure: Before joining Dawn Capital, the Enterprise Software and FinTech VC fund in Europe, to focus on Software scale ups, I spent 6 years advising and providing debt to European and US businesses from technology startups to public companies. The first two years of my venture career were spent as part of the founding team for Columbia Lake Partners, the European venture debt fund backed by the partners of Bessemer Venture Partners.)