Venture-sponsored enterprise companies looking to fund growth use venture debt as a way to get the non-dilutive capital they need to extend their cash runway. The value that venture debt brings is attractive to fast growth companies in industries like SaaS, Medical, or Fintech. Capital raised through debt financing can be used in ways to power the company to the next level for expenses such as hiring critical staff, purchasing machinery, or adding technology to streamline operations. This in turn, helps the company elevate revenue and increase the company’s valuation. Let’s look at some examples of venture debt financing for fast growth companies.
Example of How Venture Debt Financing can work with Venture Capital
Let’s say you create a technology company that has already raised $5 million in Series A funding to get the company off the ground. After a period of time, your company gains momentum and begins to generate revenue. It’s clear to your investors that your company has the potential to grow and be profitable. Month over month revenue has increased and the company’s valuation has gone up.
Yet you still don’t have enough cash to get it to get to the next milestone. To gain more traction in the market you know you need to invest in a go to market strategy, as well as a larger sales team to gain new customers. You then move to Series B funding. In your Series A round, you had to give up a piece of your ownership. With Series B funding, you will have to give up more. You raise an additional $10 million to invest in a growth plan that includes hiring, marketing and further product development.
Let’s say you then discover a competitor that created software similar to yours, and they have a large market share. If you acquire this company for $5 million it would allow you to quickly gain a large market share, gain resources you don’t have, and inherit an experienced technical staff.
But you can’t acquire the company and stay on track with your original plan for that cash, and you don’t want to further dilute your ownership with another round of funding.
Rather than raising Series C funding, you decide to raise $5 million in venture debt instead. This way you are able to acquire the company to boost your company’s growth, increase your company valuation, and not have to give up any more ownership of your company.
Using Series Funding in Conjunction with Venture Debt
Another one of the examples of venture debt financing is to use it in conjunction with raising equity. In this case, rather than raising $10 million in your Series B, you could raise $5 million, and raise an additional $5 million in venture debt. The smaller equity raise means less dilution for founders and employees, and for investors it means they don’t have to give as much cash.
This allows you to extend your runway until the next round, where you can raise another combination of venture debt and equity. This way you would maintain more ownership of the company, and get the cash needed to fund growth.
Companies with reliable revenue and predictable growth are prime candidates for venture debt. It can be used in conjunction with venture capital, or in addition to venture capital to allow founders to maintain a larger percentage of ownership, spend less time fundraising, and spend more time growing their business.
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