What Do Venture Capitalists Think About Venture Debt?

Q: What is your view on venture debt?

A: (Jason)  I like Venture Debt under the right scenarios. Companies can fund themselves through debt much more cheaply than equity in most situations and debt can help smooth receivables lumpiness, provide equipment financing and a host of other useful things. I think Venture Debt sometimes gets a bad rap, because it’s easy to find stories out there of companies who had their venture debt called at the most inopportune moment.

“Venture Debt” is not bad. It’s the debt holder that can be. My suggestion is to only deal with venture debt providers who are regular, long-term players in the market who themselves, exhibit good financial strength. There are plenty of banks who have dabbled in our market. They’ve made huge pushes to acquire a start up portfolio and then have decided this is not a strategic market for them. They’ve then started calling loans and exhibited other weird behavior.

We’ve seen other debt providers who don’t enjoy financial strength themselves and their financial backers get flakey and thus they become even more difficult to deal with.

Bottom line, all debt is not equal. Make sure that your provider has been around the block and intends to stay in this market long term. With this, you’ll generally get fair play in the debt arena, as each of you intends to be around the venture ecosystem for a while and has no incentive to act poorly.

  • Dan

    Could you name some examples of reputable venture debt firms?

  • Jason

    In alphabetical order:
    Bridge Bank
    Silicon Valley Bank
    Square 1
    There are plenty of others – this is not an exhaustive list, but these are the folks that I’ve personally worked with the the past 7 years.

  • Having been both an issuer and a source of venture debt, I agree with Jason’s note and offer that lenders and borrowers do have the ability to anticipate and define a possible “most inopportune moment” in the future and come to terms upfront that represent a better deal for both parties. A company who has just sold equity capital and expects to create significant value prior to a follow on round of equity financing would, for example, value a “forbearance option” on a venture debt or venture lease payment to allow a couple months for the company to better negotiate with potential equity investors. It is possible that a lender could define conditions and compensation by which this forbearance would be justified and attractive.
    Skeptics will say this is a form of insurance that borrowers and lenders may not be willing to come to terms on and I am one of them. Still, because there is really no limit to the potential cost of either equity capital (to the upside) or the impact of a rogue note holder (to the downside), there is ample room to find a better deal for both parties when there is genuine interest to do so.