Silicon Valley Bank’s nosedive has soured many on venture debt, and for early-stage companies, it bears being cautious. As an option for growth-stage companies with more predictable cash flow, however, things may be a little different. TechCrunch+ spoke with David Spreng, founder and CEO of Runway Growth Capital and author of “All Money Is Not Created Equal” to help to clear up some of the misconceptions that surround debt.
Even though the interest on venture debt is usually astronomical, venture debt’s main advantage is that it doesn’t require startups to give up any equity. Not diluting shares in order to raise money can have a huge impact on the economic outcomes, and raising money through a bank loan is usually much easier than raising a round of venture capital.
Though taking on debt isn’t always the best option, there are some circumstances you may find yourself in where it makes the most sense.
Venture debt is a way of borrowing money, usually between $1 million and $100 million, without any tangible assets to secure it. This is where it differs from a business loan. You might be able to get yourself an unsecured business loan early on in your company’s life, but it’ll be for a relatively small sum of money and the interest rates on it will be on the high side. In some cases, founders have to supply a personal guarantee when they take one out. A secured loan, on the other hand, takes tangible assets as collateral. Startups might not have a whole lot by the way of tangible assets, but they could have other valuable assets. This is where venture debt comes in.
Venture debt is borrowing that’s secured against your intangible assets: predictable future revenue, your IP, and your future VC backing, for example. There are effectively two types of venture debt: early stage and late stage. Early-stage debt tends to be offered on the basis of a startup’s VC backers. Spreng’s own shop, Runway, on the other hand, provides only late-stage debt. It’s for companies that are on the verge of profitability but need an injection of funds to help them obtain the growth they need in order to reach it.
Ultimately, you need to remember that whether you raise funds through equity or through debt, all money has a cost. Read More TechCrunch