What is a Venture Debt? Definition, types and examples

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The growing investment culture has led to the emergence of numerous financing modalities and a whole glossary of associated terms that are important to know. Today we explain what Venture Debt is and present the examples of funds from Silicon Valley Bank, Lighter Capital and InnoVen Capital.

What is Venture Debt?

Venture Debt is a hybrid financial instrument that combines debt and equity, aimed at companies invested by Venture Capital to finance their working capital or capital expenditures, such as the purchase of equipment.

Unlike traditional bank loans, it is available to startups and growing companies that do not have positive cash flows or significant assets to use as collateral. Venture Debt providers combine their loans with warrants or stock purchase rights to offset the increased risk of default.

This image illustrates the work in a Startup that has been invested by Venture Debt.

This financial product can be a highly advisable source of capital for entrepreneurs. As a complement to equity financing, it allows raising more capital through a financing round while minimizing dilution for both employees and shareholders.

How does Venture Debt work?

  1. Initial Screening
  2. Term Sheet
  3. Due Diligence y Investment Approval
  4. Legal and Funding
  5. Portfolio Management
  6. Investment Exit

Venture debt investors, which are typically commercial banks or specialized financial firms, often require Due Diligence and the backing of another investor as collateral for this type of financing.

In addition, this is a common investment model in investment markets for technology-based companies, such as the US, the UK or Israel, and has been used in its initial stages by companies such as Facebook or Box.

Primary Uses of Venture Debt

  • Increase valuation
  • Increase liquidity
  • Increase investment capacity
  • Finance an acquisition or investment
  • Bridge financing to accelerate growth prior to an investment round or prior to a sale
  • Finance working capital needs

Venture Debt Types

There are three different types of Venture Debt:

  • Expansion capital or development capital: these are usually term loans used in M&A (mergers and acquisitions) transactions, stage financing or working capital.
  • Accounts receivable financing: loans to finance accounts receivable on the balance sheet.
  • Equipment financing: loans for the purchase of equipment, such as a company's digital infrastructure.

Differences with other types of funds

The Venture Debt, in addition to being a non-convertible term loan, has an interest cost of between 10% and 15% and generally does not have any participation rights in the Board of Directors.

However, Venture Capital, as its name implies, does not contribute debt to the invested company, but capital. Therefore, the amount invested does not have to be returned to the Venture Capital, but they get the return by selling their stake in the company. Both types of financing are complementary.

Other types of financing with which VD should not be confused are:

  • Convertible Debt: loan (usually provided by an equity investor) that converts into equity in the company's next round of capital.
  • Working Capital Line: revolving line of credit that is secured by working capital. It may or may not include warrants to purchase shares of the company's stock.

Real examples

Lighter Capital y Silicon Valley Bank ayudan a impulsar el crecimiento de Sendlane

Sendlane is an innovative software company that enables e-commerce brands and content creators to collect, segment and automate the customer journey through email marketing and SMS. Headquartered in San Diego, California, the organization was co-founded by CEO Jimmy Kim, CPO Zak Metfah and consultant Anik Singal.

Venture Debt, Lighter Capital, and SVB collaborate to drive Sendlane's growth

Lighter Capital, a U.S. Venture Debt fund, has made 320 investments including the two it made in the software company. On July 29, 2020, the fund invested in Sendlane half a million dollars, while in the second round of financing there was an injection of 450 thousand. On both occasions Lighter Capital was supported by Silicon Valley Bank.

With Lighter Capital's funding, Sendlane experienced faster growth with revenues of $130k per month now reaching $210k per month.

InnoVen Capital invests in UpScalio

UpScalio is India's next-generation, data-driven consumer goods company. They acquire e-commerce companies that sell on Amazon, Flipkart and other marketplaces, as well as their own websites. They are backed by hedge funds and private equity firms from around the world.

Homepage - InnoVen Capital

UpScalio guarantees profits to the original founders, providing a full exit over time. This company provides the capital and its team takes full responsibility for growing the business 5 to 10 times, maximizing wealth creation for the founders.

Innoven Capital has made 183 investments since its inception as Venture Debt. Its latest investment was made on August 17, 2021 in UpScalio for a total amount of $42.5 million.

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