Insights series / 04 October 2021
4 reasons to get excited about Venture Debt
Over the course of the BVCA roundtable on venture debt, chaired and sponsored by Crestbridge, Alex Di Santo (Head of Private Equity for Crestbridge) and Mark Collins (Director, Fund Services for Crestbridge) were joined by prominent guests from across the venture capital and venture debt industry, including some of the best known and biggest names in the space in the UK.
Venture debt may be one of the best-kept secrets within private markets, but it’s growing in popularity. Here are four reasons to get excited by venture debt, for start-up founders, investors and managers alike.
1. Founders don’t have to give up control in their company for venture debt
As Covid-19 spurs on new and exciting start-ups, the new pioneers of the post covid digital economy are looking for ways to raise funding without conceding control. Venture debt leaves the equity in the hands of founders and there’s no need to give a debt provider a seat on the company’s board. This ensures more control over the business for founders when taking on this type of funding. Alex Di Santo, Head of Private Equity for Crestbridge, points out that research suggests founders going down this route “retain around an extra ten percent of ownership when using venture debt, versus equity financing.”
2. It’s quick and high impact for short-term financing requirements
Venture debt is relatively quick to secure and can act as a bridge between funding rounds or new projects requiring high levels of expenditure over a relatively short period of time. An example of the latter could be a card company looking for financing to increase production in the short term around Valentine’s day. In such scenarios, venture debt is better to take on as it means a founder is not permanently giving up a portion of ownership for a short-term financing requirement.
3. For mangers, it’s a relationship-based lending model where the existing equity sponsors are the safety net
Venture debt managers are as much lending against a start up’s sponsor base as against the company itself. Whilst the company’s numbers are something all managers will look at before approving a loan, the manager understands that they are ultimately lending money to a pre-profit or perhaps pre-revenue start up. Therefore, no loan will be made until the manager is satisfied existing sponsors will provide further capital in a future fundraising round. Given this, a very good working relationship is needed with the existing sponsors, who are effectively underwriting the start up’s debt and will most likely be paying for the interest payments through their previously invested capital in the start up company.
4. Good returns for managers and their investors
“A few people had this weird idea that lending money to early stage, loss making businesses might be a sensible thing to do,” said one participant in the recent roundtable. It’s now an identifiable asset class in its own right, but it is clear that this form of lending can be high risk. Of course, it’s also high return, as Alex Di Santo observed “data shows returns from venture debt are very, very attractive for managers and their investors,” meaning there’s good incentive to offer the product in the first place.
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