What are the key differences between venture debt and venture capital?

You will get a lot of different answers here, but let me highlight one thing most folks miss:

There is no free lunch.

Venture capital/equity is expensive. You often have to sell 15%, 20%+ of your company in chunks. Sell 3–4 chunks and that’s most of the company sold … off.

But … with few exceptions, it’s 100% risk capital. No one expects their money back. And VCs are OK in the end writing off up to 40% of their investments.

Venture debt is relatively cheap. You may pay, after costs and fees, maybe 10% interest and some small warrant coverage (i.e., a small amount of equity). The nominal interest rate may be lower, but after all the fees and terms, you’ll see it often costs about 10% or so. But whatever the terms, venture debt is much, much cheaper than equity/venture capital.

But the thing is, venture debt has to also be much lower risk. You can only get so much of it. Often, much less than you could raise with equity if you aren’t generating a lot of recurring revenue. Venture debt generally has conditions, and covenants, and terms that restrict how much you can spend — which equity doesn’t. And you have to pay it back! 😉

My rough rule is net of fees, covenants, and a repayment schedule, you only can really access say 50% of a venture debt line fully.

Venture debt can be great if you can get it, as are other sources of less and non-dilutive financing. But they are cheaper for a reason. Folks often miss that simple point. These financiers take less risk. They have to.

The right tool for the right job, and at the right time.

A bit more here: https://www.saastr.com/good-and-…

Published on November 5, 2019

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