In the current surging rates environment, raising capital from VCs or angels has become increasingly expensive for companies, leading many founders to delay raising new rounds or to look for alternative sources of capital as the end of their runways loom.
Venture debt is one source of alternative financing that founders are increasingly turning to. Our Managing Partner Carlos Espinal chatted with Craig Netterfield from European venture debt specialist Columbia Lake Partners about:
– What exactly venture debt is?
– What type of companies venture debt is suitable for?
– How they “operate like a VC, but give loans rather than take equity”.
Carlos: How is venture debt different from traditional banking debt?
Craig: Traditional banks and venture lenders differ in three key areas:
- View of collateral.
Most traditional banks will only consider assets (real estate, accounts receivable, re-sellable inventory, or machinery) as collateral for a loan. Less traditional banks will also view positive cash flow, even from asset-light companies, as collateral. Most banks will typically not loan to any loss-making companies.
Venture lenders typically lend to a much larger range of companies. This includes companies that are making losses if the cause of the losses is to increase enterprise value, for example, by growing revenues, creating intellectual property, or both.
- Lender protections.
Banks typically require loanees to keep cash deposits in an account at the lending firm. They also commonly use financial covenants as tools to help them manage the risk of their loans.
Venture lenders won’t use (Read more...)
