What Stage to Consider Venture Debt

The stage that companies should consider using venture debt is a really interesting one. A lot of companies use it when they’re pre-revenue and they’re trying to extend the time from series A to Series B because they’re expecting a big step up in valuation, and that can be useful.

It’s more useful when a company is transitioning to profitability or transitioning to a sale. So sort of bridging to a profitable cash flow positive business, or bridging to the sale of a company. And the reason for that is that you’ve got cash flows you’re expecting from operations that will enable a company to be able to service the debt.

Debt feels really good on day one. You’re going to borrow let’s say– the minimum deal we’ll do is three million dollars–so if you borrow three million dollars and you do it at a twelve percent interest rate on a three-year note, the monthly payments will be roughly 100,000 bucks, a little bit less. So you’re going to look at it in the future, when I have that monthly. So the debt feels great on day one and you get the three million dollars in the bank but every day after day one it’s now part of the burn rate of the company.

You’ve got to forecast okay how it is going to feel relative to the cash flows that I have in the business– will I eventually be able to grow into this debt.

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

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