Venture debt can be a good choice for startups that need additional capital to scale their business but do not want to dilute their equity. This structure allows the lender to participate in the startup’s upside potential while limiting its downside risk, which in turn assists in its provision of “traditional debt” capital to “non-traditional” borrowers. In addition, unlike traditional bank loans, venture debt is often structured as a loan with warrants or equity kickers, giving the lender the right to purchase equity in the startup later. ![]() These lenders usually focus on a borrower’s ability to raise capital to fund growth and repay debt rather than other measurements for obtaining debt, which focus on historic cash flow or working capital assets. It is typically provided by specialized lenders who understand the risks and opportunities of the startup ecosystem. Venture debt is a type of debt financing tailored to startups’ needs. So, what exactly is venture debt, who is it for, what are its risks-and now, what is its future? First, to provide the overview we originally planned, but now, to also give our thoughts on its future. It is also important to note that the collapse of SVB was unrelated to its traditional business model and, more specifically, the business of providing capital in the form of venture debt.Īs a result, it is still important for us to cover this topic. Hercules Capital and Square 1 Bank, among others, provide the same or similar sources of capital to the startup ecosystem. ![]() But, SVB was not the only provider of such debt. The loss of SVB will undoubtedly constrain the availability of venture debt in the near term.
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