4 Ways to Avoid Surprises When Considering Venture Debt

// Andy Weyer - SVP, Technology Banking

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March 5, 2014
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Many entrepreneurs have heard horror stories about taking on venture debt. Whether a lender fell asleep at the wheel, a borrower painted too rosy a picture about operating progress, and/or an investor had a change of heart, these horror stories tend to end the same way – with a lender sweeping cash, a borrower unexpectedly ceasing operations, vendors taking legal action, and Board members vowing never to do another venture debt deal. In my experience, these types of situations tend to be the exception as opposed to the rule (see this post on the subject from my colleague, Zack Mansfield). Regardless, the common theme seems to be that one or more parties were surprised by the other’s actions, so here’s my advice on how to avoid these types of situations altogether:

  • Understand that venture debt does not equal venture capital. Reputable venture bankers will do everything within their power to balance their own fiduciary responsibilities (e.g. protect other customer deposits against loan losses) with a Borrower’s requests for accommodations if that Borrower has provided proactive, transparent, and honest communication. But ultimately, lenders expect to be repaid.
  • While it may sound counterintuitive, establishing financial covenants or milestones at the onset of a venture debt transaction can help avert, rather than create, situations like the one described above. By outlining the rules of engagement upfront, you can minimize the chances of surprises later.
  • Work with partners who have a track record of behaving a certain way. Customer references and investor endorsements should trump deal terms.
  • Choose a lender that understands your business and/or help them become an industry expert so that they can become familiar with what you do, and what your company needs. We’ll explore this topic in my next post.

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