In the coming weeks, I’ll be answering the question: what is venture lending? To kick off the series, let’s take a look at some of the types of loans venture banks provide.
Traditional middle market lenders generally require tangible assets to collateralize loans and/or a track record of operating cash flow to qualify for debt -- two things that most startups don't have. Venture banks typically take a different approach. By underwriting to the quality of the technology, market opportunity, management team, investor syndicate, etc., venture banks can provide access to capital throughout a company’s lifecycle.
Let's look at a few examples:
Funding Need: Additional capital needed to close a Series B or obtain Phase I approval.
Debt Financing Solution: Debt available upon receipt of Series B term sheets or satisfactory clinical trial results.
Cash Runway Extension Loans
Funding Need: Enhance valuation in the next funding round.
Debt Financing Solution: Debt monitored by a performance metric like user acquisition or cash burn.
Growth Capital Loans
Funding Need: Purchase equipment or increase headcount.
Debt Financing Solution: Debt available upon achievement of a certain milestone like releasing a new product or closing a marquee customer contract.
Working Capital Loans
Funding Need: Finance product delivery costs until receipt of customer payments.
Debt Financing Solution: Advances available at 80% eligible accounts receivable, 3-4x monthly recurring revenue, etc.
Funding Need: Acquire assets of another company for synergistic, defensive, or "buy vs. build" reasons.
Debt Financing Solution: Debt monitored by an operating metric like revenue or EBITDA.
The next installment of this series will cover typical terms of debt financing for startups.
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