Mar 15

How A CFO Evaluates a Venture Debt Proposal

Venture Debt Proposal

The CFO’s job in diverting a venture debt proposal is pretty easy, although there are some common pitfalls.

So with the typical processes is you take you get competing proposals from a bunch of different lenders and you create an Excel spreadsheet you take all the lenders you put on one axis you put all the terms you put on another axis and the CFO’s job is to maximize the terms for the benefit of the company.

Oftentimes what they’ll do is they will calculate the IRR [internal rate of return] that’s implicit in cash flows of the deal, and they’ll make the assumption that the lowest IRR is the best deal for the company, and that may be the case, but looking at the IRR is really looking at it from the lender’s perspective.

If the money were as valuable in our account as it is in your account, it would never change hands right? So the money has to be more valuable to a company, and in fact the value of a venture debt deal is more dependent upon the growth rate of your company than it is the IRR implicit in the cash flows.

The faster your company is growing the more valuable that debt is today and the cheaper the payments are going forward because if you’re paying, if the time value of money for a company were constant you would only do one round of financing, you’d never raise multiple rounds of VC financing, but companies know I’m going to raise multiple rounds of financing because my future dollars are going to be much cheaper than the dollars I’m taking in today.

Debt VCs work the exact same way instead of focusing on the IRR we should be focusing on the value, how much cash you get when you absolutely need it and what costs that had in order to get that value at that point when you were about to earn that money.


Meet Tim O’Loughlin, Investment Partner at Eastward Capital Partners

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