Venture Debt is very cheap these days, but 4 common mistakes I see founders & investors make:
1)Agnostic about the lender; it matters more than you think
3)Take too much; limit to ~30% of recent funding
4)Not having clear visibility to next round milestones
— samir kaji (@Samirkaji) November 9, 2020
I’ve always been a fan of venture debt and similar products, used properly. Back in the day at EchoSign / Adobe Sign, we crossed $10m in ARR having raised less than $8m. But we also quietly raised a few million in venture debt, which let me make more hires and keep the engines running without having to raise another round. I used that debt so I didn’t have to run the gas tank with the empty light on. It worked.
I’ve also seen many start-ups I’ve worked with quietly do the same. Talkdesk got to unicorn status, selling to the enterprise, having really only raised 1 1/2 rounds. But they also quietly raised eight figures in venture debt to skip a round. More in our discussion here:
And yet, so many VCs and others have horror stories around venture debt and debt in general. Too much raised, and too much spent. Debt encouraging reckless behavior, when what was really necessary was cutting the burn more quickly. Using debt to bridge to another round that never came and not dealing with the real issues, etc.
i am a fan of everything from pipe to clearbanc to lighter capital. they all help.
debt has always been available, but often only as venture debt.
these products help democratize it.
but in the end, debt cannot take the same risk as equity. so impact is smaller.
— Jason ✨BeKind✨ Lemkin ⚫️ (@jasonlk) March 4, 2020
I didn’t really know how to summarize my feelings on debt until I was on a board with John Doerr. I learned several things from him. One was that investing at Slack at $1b was “our biggest no-brainer”, back when people thought that was a crazy number. He was right.
And the other thing he said really stuck with me on debt for SaaS companies: “Raise It. Just Don’t Spend It.”
Fast forward to today, and there are so many exciting equity alternatives, from so many sources. Debt for SaaS companies used to be restricted to venture-backed companies, where the VCs would basically act as backstops. Today, the world is better in so many ways. Bootstrapped and other SaaS companies can now raise debt from many amazing sources.
And I encourage it. Debt isn’t free, but it’s so much cheaper, at least in theory, than selling shares.
But I still always say: Raise It. But Don’t Spend It.
And what do I mean? I mean use debt to make that extra accretive hire. To let you not stress about hiring that extra rep, or doing that extra campaign now, instead of later. Use it to fill gaps in the return on marketing programs. If you can make money on an investment in a teammate or a program or an event in 3-4 months, use debt to fund that. That’s a great use for debt. Using debt as a buffer to fund accretive things today.
But don’t allow debt to raise your core burn rate, at least not by much. That’s where you get in trouble.
Don’t allow debt to bail you out when you are running out of money. That never works. Your business never recovers in time. If you have to cut, cut now. Don’t use debt as a crutch.
Remember, debt doesn’t take big risks. It can’t. But it’s an amazing tool in SaaS, because the revenue recurs. Raise it. Use it as a buffer when you invest in people + programs. But don’t, on a net basis, really spend it.