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.
The views, opinions, beliefs, conclusions, and other information expressed in this material is not given, verified, or endorsed by Square 1 Financial, Inc. or any of its affiliates. Instead, this material is solely the work of the author, and represents his views, opinions, beliefs, conclusions, and other information he wishes to present, in all cases without any manner of endorsement from or verification by Square 1 Financial, Inc. or any of its affiliates.
This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that the author believes to be reliable, but which has not been independently verified by the author, Square 1 Bank, or any Square 1 affiliate, and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal, or other advice, nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to this material should be construed as a solicitation, offer, or recommendation to acquire or dispose of any investment, or to engage in any other transaction.
All material presented, unless specifically indicated otherwise, is under copyright to the author or Square 1 Financial, Inc. (or its affiliates), and is for informational purposes only. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied, or distributed to any other party, without the prior express written permission of Square 1 Financial, Inc. or the author. All trademarks, service marks, and logos used in this material are trademarks, service marks, or registered trademarks of Square 1 Financial, Inc. or one of its affiliates.
Square 1 Bank is a member of FDIC and Federal Reserve System. Square 1 Bank and the Square 1 logo are among the trademarks registered to Square 1 Financial, Inc. Square 1 Asset Management, a registered investment advisor, is a non-bank affiliate of Square 1 Bank. Products offered by Square 1 Asset Management are not FDIC insured, are not deposits or other obligations of Square 1 Bank, and may lose value.
Back To Insights