Now that you’ve realized the benefits that venture debt provides and are ready to take that step toward getting financing, you need to know more about how to find the right venture debt firm to work with and position your startup in an appealing light.
Just like you’ll be interviewing a range of private debt firms to find the right fit, so too will they be looking at you to determine whether your startup is a viable—not to mention lucrative—investment for their portfolio. The better informed you are about the venture debt process, the easier it will be to find the right fit. And of course, don’t underestimate the value in finding the right fit, creative funding solutions can make all the difference in helping your startup reach its goals.
Know Your Options for Venture Debt
Just like with traditional bank financing, there are several options when it comes to venture debt.
If you need a lump sum all at once, a term loan might be a good fit, but if you’d rather have access to some cash now and more later, consider a line of credit. Remember to ask the lenders what structures they can provide.
Another option is a convertible note or a convertible term loan, both start as a debt instrument, but can be converted into an equity investment down the road. Some venture debt firms also offer revenue or royalty share, which is great if you don’t have an established revenue that allows you to pay a fixed amount each month. With this option, you sell a percentage of your future revenues or come to an agreement on what repayment looks like based on future revenues.
Have a Plan for the Use of Capital
There are a variety of ways you can use your venture debt. If you’ve already taken out venture capital, the debt can complement it.
The funds can be used to expand operations. That might mean hiring engineering or sales teams so you can better serve customers. You could also use it to fund customer acquisition costs, such as advertising, marketing, and sales expenses.
Venture debt could also help you reach milestones that will impress investors and help you qualify for future rounds. That might include hitting a new level of Annual Recurring Revenue (ARR) to support your valuation before your next funding round or securing your first 10,000 customers.
One of the biggest struggles for startups is reaching profitability, and often it requires capital to get there without taking on another round of equity. That’s where venture debt can be useful. As they say, it takes money to make money, so venture debt might be the catalyst to propel you to those milestones and profitability.
Know What Venture Debt Firms Want
Once you have a more concrete vision for how to use the capital you borrow, let’s dive into what venture debt firms want when taking on clients.
As you might imagine, risk comes into the picture. Generally, the lower the risk a startup offers, the more compelling the opportunity for the lender which will help reduce borrowing costs. So consider what your level of risk is: do you already have debt that makes your debt-to-revenue ratio high? Do you have an established, loyal customer base, and what is your track record for executing on growth plans? These are risk factors that lenders will look at.
Lenders also appreciate a sticky business model, that is, one that resonates and solves a key problem which, in turn, leads to longer term relationships with customers.
They may also want to discuss collateral, including intellectual property, that you can put up against your loan. And some lenders may require you to already have one or more rounds of funding.
Button Up Your Business Plan and Financial Reporting
Venture debt firms want you to have done your own due diligence to prove to them that you’re a worthy risk, so make sure you are prepared to follow up with answers to any questions they may ask you about growth strategy and forecast, your customer base, competitive landscape, among other topics. If it’s been a while since you looked at your business plan, this could be a good time to review and refresh.
Be able to show off your track record and business plan, and make sure financials are up to date.
Make A Connection
Now the trick is finding a venture debt firm that’s a good fit for your startup. The best place to begin is to ask for a referral from people in your industry or in the startup world. If they’ve worked with this firm, what has their experience been?
Consult with your trusted advisors to find a lender with experience providing funding to startups in your industry, who may have resources and connections that can help you grow.
Partners for Growth may be the venture debt firm you’re looking for. Get in touch to see what financing options we can offer you.