POV: It’s time entrepreneurs seriously consider venture debt in their capital raising roadmap
Short-term glory
It's become a sort of an emblematic symbol of pride for many budding entrepreneurs to share their latest round of equity based capital raising backed by VC funding.
A question worth asking at this point: Are many early-stage entrepreneurs short-changing much larger long-term gains by overextending their dilution of equity in their initial stages?
This brings us to the role of a hotly discussed and many times misunderstood instrument for growth planning - Venture Debt.
What is venture debt?
Firstly, it is important to understand the basic structure of what venture debt is.
It is a form of debt financing aimed at start-ups and early-stage companies. Unlike traditional forms of financing, venture debt is offered to companies that do not have significant assets or positive cash flow.
It is available to venture-backed, early- and growth-stage companies. It is provided by tech banks and dedicated venture debt funds, typically in a 3 or 4 year term loan that can be more flexible in terms than traditional banks e.g. interest-only for the first year and then having an amortization profile for the remainder period specifically relevant for the circumstances of the company.
2 scenarios when venture debt offers a big advantage
Entrepreneurs seeking high degree of strategic autonomy post initial funding: Venture debt in principle does not require you to appoint a lender representation on your board. This is a big boon for start-ups who do not want to stunt their growth strategy due to consensus building conflicts.
Early-stage start-ups with relatively weak initial valuations: This could be the reality of many technology-based start-ups where extrapolating the future potential of the business can be challenging in the initial years. Their innovation continues to evolve and other key functions like sales, partnership and marketing need to be put in place for scaling.
SEA: Equity vs. Debt based capital raising distribution, an opportunity waiting to take-off:
Source: https://www.pwc.com/sg/en/financial-services/assets/venture-debt.pdf
While venture debt has seen some growth over the last few years in Southeast Asia, it has still not seeped into the mainstream capital raising strategy. “Borrowing”, will always have certain notional hurdles, especially amongst young entrepreneurs. But with more sophisticated structuring of debt, including convertible debt - where the loan amount can be converted into future equity on a specific date and in specific circumstances - the risks for businesses can be better managed.
Building the right mix for raising:
Venture debt is not designed to replace all the advantages of equity-based capital raising. Instead, it should be seen as an instrument to bring in more cash-flow in the interim period between funding rounds without running the risk of premature dilution of equity.
Hence it is important to develop a clear roadmap for the need for capital through the initial development years.
Yefira’s offering in the venture debt space:
Our razor focus at Yefira Group is to help entrepreneurs achieve their growth and valuation goals faster.
Rather than a predisposed bias towards a particular part of the capital spectrum, our approach is to work with our clients to define not just their immediate capital needs but to look over the horizons two to three years with some detailed modelling. This analytical approach usually clarifies which options to pursue-debt or equity, often in parallel or in coordination.
Our track record in the asset finance space has delivered much structuring nuance to our deals closed in 2022 and also in the pipeline. We have invested much time getting to know the criteria of relevant funds in Australia, Asia, Europe, and the United States and would be delighted to share our insight further with you to turbocharge your growth.
Click here to subscribe to our newsletter.
Yefira Group