WHY USE VENTURE DEBT?
Capital efficiency is essential in ensuring the success of a start-up. To that end, VC backed companies use debt to leverage the equity that they have raised to allow them to extend their financial horizon and make the equity last longer and be used more productively, whilst minimising the impact of dilution.
The increased runway provided by venture debt allows a venture backed company time to achieve additional milestones before its next round of financing. Achieving these additional milestones will normally result in a higher valuation and a more successful next round of financing, thereby lowering ownership dilution for the current stakeholders. This concept is illustrated in the diagram below:
In the case of later stage venture backed companies, an ETV debt facility can provide the company with sufficient funds or a cash buffer to get it to cash flow break even with less dilution than raising equity financing. This scenario is illustrated in the example diagram below:
Overall, debt is considerably cheaper than equity from a shareholder dilution perspective and by using the debt to finance certain expenditure companies can conserve their expensive equity money for more productive and value creating uses.