ETVCapital

FAQ

• Q:  What are the typical scenarios for Venture Debt?

  A:  

  Venture debt exists to leverage equity capital in order to reduce dilution and provide the opportunity for maximising capital gain. Venture Debt tends to be used in two scenarios:

  
  

  • Growth financing: Venture Debt in the form of growth capital can fund product development, international expansion and acquisition of complementary technologies and teams. It allows entrepreneurs to implement strategies or operational measures where the cost of equity capital is not justified. Venture debt can be used to finance not only general expenses (such as working capital, marketing, or the completion of large orders) but also fixed asset purchases in order to preserve equity capital for activities that enhance enterprise value (e.g. R&D).

   

  • Runway extension: Venture Debt can optimise the sequence and valuation of future financing rounds of a VC backed company. For example, an entrepreneur may be looking for a “cash buffer” to extend his cash runway whilst minimizing further dilution; or a company may wish to buy extra time to achieve a development milestone or complete the negotiation of a licensing deal in order to increase the company’s valuation before raising further equity. Venture debt can also avoid a last financing round before break-even, trade sale or IPO.

• Q:  What are the Pre-conditions for Venture Debt to be made available to a company?

  A:  

  In general the 3 pre-conditions to Venture Debt being made available are:

  • Meaningful institutional Venture Capital support for the business. 
  • Proprietary Intellectual property owned by the business. 
  • A level of cash runway.

• Q:  How does Venture Debt meet the aims of founding entrepreneurs and management?

  A:  

  Building a new and successful company is very challenging and the rewards, when they come, are well deserved. What can happen, however, as the business plan calls for more and more funding is that the percentage of the company owned by the founders and the executive management is reduced by successive rounds of equity financing. Dilution, in other words, becomes a real issue; not just for the management team but also the existing institutional shareholders. But if Venture Debt is used, in substitution for part or all of a proposed equity round or as a bridge between equity rounds, the early stage investors and those who run the business can keep a greater proportion of the company than would be the case if the funds required were made available solely by venture capitalists. The key points are:

  • it lowers the total cost of capital to the company;

  • it allows the company to change the timing of its equity rounds to benefit current shareholders and minimise dilution;

  • it does not affect the valuation and does not distract management as much as raising equity ; and

  • is much faster than an equity round to implement, with lower completion risk.

• Q:  How does Venture Debt help VCs?

  A:  For the venture capitalists, Venture Debt leverages equity capital investments providing stability to a VC’s portfolio by adding additional financial sources whilst minimizing their own dilution. In addition, Venture Debt also enables the institutional investor to keep some “dry powder” for future equity rounds and augments equity returns through its lower capital costs.

• Q:  What are the downsides?

  A:  Venture debt is not suitable for all companies. Due to its amortising nature, debt is a less flexible product than equity and works best when the company really can support it. Also, as binary outcomes are not necessarily attractive to lenders, certain good equity investments may not work as debt deals.

• Q:  What should I look for in a Venture Debt provider?

  A:  The first thing is to be sure that your proposed provider truly understands the nature of venture capital backed businesses – you need to have confidence in the people that you are partnering with. Make sure that venture lending is a core offering of their business, and take references from other companies and venture capitalists that the provider has worked with (e.g. do they have a history of repeat lending to portfolio companies and can they grow with you).

• Q:  What differentiates ETV from banks?

  A:  

  Most traditional banks would not finance technology companies at such an early stage. They would typically make a loan contingent on a certain level of receivables or by taking directors' personal guarantees as collateral. They do not leverage the company’s enterprise value to extend cash runway. Moreover, relying on a formula based A/R or factoring line poses a risk for your company if the level of receivables is lower than originally perceived and the receivables line gets cut. Finally, it is not ETV’s intention to convert its portfolio companies into traditional commercial clients. With regard to other Venture Debt providers, our differentiators include:

  • flexibility and creativity in working with our portfolio companies;

  • calm and constructive when problems occur;

  • long track record – we’ve been providing Venture Debt since 2000;

  • strong relationships with venture capitalists and entrepreneurs; and

  • track record of repeat lending to portfolio companies.

• Q:  What is ETV’s typical deal size?

  A:  ETV has participated in deals as small as €750,000 and as large as €15,000,000. Typical deals are €2,000,000 to €5,000,000.

• Q:  What is the typical structure of a Loan from ETV?

  A:  

  A typical venture loan from ETV is a three year facility repaid in equal monthly payments of principal and interest. The interest rate is fixed at the outset (aiding budgeting) and the monthly payment to ETV is therefore for a fixed amount.  Where required for purposes of regulatory requirements, the facility may be structured as a secured bond.

• Q:  What is the typical Security Structure of a Loan from ETV?

  A:  Usually ETV will need to be senior secured over all the assets of the borrowing company, including the intellectual property.

• Q:  How long do transactions take to be approved?

  A:  The process of raising Venture Debt should be much quicker and less time consuming for management than raising the equivalent amount of Equity. Once the terms and conditions of the Venture Loan have been agreed in a term sheet due diligence is commenced, involving a review of the business plan, visits to the company, an assessment of the "space" in which the company operates and conference calls with the VCs already supporting the business. With the company’s permission, customers or prospective customers of the company are also contacted. An investment proposal is then prepared for submission to ETV’s Credit Committee and documentation is drawn up. The whole process from agreeing a term sheet to funding the Loan typically takes six to eight weeks.

• Q:  What are Warrants?

  A:  

  As part of a venture Loan ETV will typically be granted a warrant or a similar type of equity instrument. A warrant is simply an option to purchase shares in the Borrower at a pre-determined price. In the first instance this price would typically be the price of the last round of equity financing. The level of “warrant coverage” (i.e. the value of the option) is generally quoted as a percentage of the value of the Loan.

   

  Warrants represent ETV’s equity participation in the deal and are a long term incentive that aligns us with the interests of the existing investors and management team in seeing long term growth in the equity value of the borrower.