What is Venture Debt? Definition, typology and examples

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

What is Venture Debt?

A Venture Debt is a hybrid financial instrument combining debt and equity, most often 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, this is available for 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 financial product can be a highly advisable source of capital for entrepreneurs. As a complement to equity financing, allows for raising more capital through a financing round while minimising dilution for employees and shareholders alike.

How does Venture Debt work?

1. Initial Screening
2. Roadmap
3. Due Diligence and Investment Approval
4. Legal and financing issues
5. Portfolio management
6. Investment Exit

Venture Debt investors, which are usually commercial banks or specialised financial firms, often require a Due Diligence and the backing of another investor as collateral for the granting of this type of financing.

It is also a common investment model in technology-based investment markets, such as the US, the UK and Israel, and has been used in the early stages by companies such as Facebook and Box.

Uses of a Venture Debt

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

Types of Venture Debt

There are three different types of Venture Debt:

• Capital expansion or capital developmentterm loans: these are typically term loans used in M&A transactions, staged 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 financing

The Venture Debt, in addition to being a non-convertible fixed-term loan, has an interest cost of between 10% and 15% and does not generally carry board participation rights.

However, the Venture Capital MethodAs its name suggests, it does not contribute debt to the invested company, but equity. Therefore, the amount invested does not have to be paid back 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 DV should not be confused are:

• The Convertible Debtloan (usually provided by an equity investor) that is converted into equity in the company's next equity round.
• The Working Capital Linerevolving credit line: a revolving credit line that is secured by working capital. It may or may not include guarantees for the purchase of shares in the company.

Real cases

Lighter Capital and Silicon Valley Bank help boost Sendlane's growth

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. Based in San Diego, California, the organisation was co-founded by CEO Jimmy Kim, CPO Zak Metfah and consultant Anik Singal.

Lighter Capital, a US Venture Debt fund, has made 320 investments, including two in the software company. On 29 July 2020, the fund invested half a million dollars in Sendlane, while the second round of financing saw an injection of 450,000. On both occasions Lighter Capital was supported by Silicon Valley Bank. 

With funding from Lighter Capital, 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 around the world.

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 by 5 to 10 times, maximising wealth creation for the founders.

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