Growing your company involves finding a business model that is repeatable, scalable, profitable, and one that creates value for both the company and its customers. During the startup phase, your company gains expertise in improving your product or service. As your business grows, you continue to refine your process to make it more efficient and more profitable. To maximize revenue once your company enters its growth stage, you need to raise capital for hiring the right people, expanding operations, or purchasing new technology or equipment. So what are your options? Venture capital financing can be used for companies that are relatively mature and have a high growth trajectory, but it often entails giving up a minority stake in the company. Another method of raising capital to consider is growth stage debt financing, which can be used as a supplement to equity raises. Unlike venture capital, growth debt financing usually involves very little dilution.
Growth debt financing (or venture debt) can make sense for founders who have already gone through several rounds of funding, but need additional funding to reach their next milestone. You can think of venture debt as structured debt for growth companies backed by venture capital. Typically, venture debt financings are relatively short-term, with monthly payments ranging from 24 to 48 months after a relatively short interest-only period.
Businesses with high growth potential or those that are preparing for an exit–such as an IPO or acquisition–should consider using growth debt rather than equity to allow their owners and investors to maintain a larger stake in the company – and ultimately, make more money for them. The pre-money valuation of companies nearing key milestones often increases as a result of meeting these milestones. Debt capital can provide the runway necessary for these companies to reach such milestones before adding additional equity capital.
Occasionally, if a company underperforms, there may be concerns that the next round of capital will be a down round, where pre-money valuation is lower than post-money valuation of a previous round. Growth stage venture debt allows businesses to raise growth capital without setting a valuation first. The funding instead enables you to fund growth initiatives and achieve milestones, which puts your company in a better position for valuation at the next equity round.
Growth Stage Debt Financing: Next Steps
You should speak with a venture debt provider even before you need to raise debt. Invest some time in understanding how venture debts work, and the terms that accompany them. Once you are ready to obtain the debt financing, this will help speed up the process.
Timing is Important
Consider raising growth stage debt financing in conjunction with an equity raise at the appropriate stage. This way your company is able to mount additional cash to help achieve a larger milestone and raise its valuation for its next financing round.
Choose Your Growth Debt Financing Partner
The reputation of your venture debt lender is important. Consider choosing a partner who understands your business, has a great track record, offers flexible financing solutions, and has the right experience to help your business grow and thrive.
While the overall venture equity market continues to grow, growth stage debt demand has been increasing for the past three decades. Because it helps improve portfolio returns for many equity sponsors and entrepreneurs, they actively seek to deploy it in their portfolio companies.
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