Founder’s Guide to Successfully Raising Venture Debt


Founder’s Guide to Successfully Raising Venture Debt

So you’ve caught wind of venture debt – the financing option that enables startups to secure capital while safeguarding Founder’s ownership stakes. Now, the real question is: How do you navigate the maze and successfully raise venture debt for your burgeoning business?

In this article, we will share the typical path that leads to venture debt success. Picture this as your startup’s GPS, guiding you through each pivotal step, from the first call to securing a promising term sheet.

Firstly, it is important to realise that venture lenders typically focus on startups that have revenue streams and possess equity backing. Nevertheless, it is best to initiate such discussions with venture lenders even if you are not actively fund-raising. This gives both parties the opportunity to grasp each other’s business models and find comfort working with one another.

Secondly, the process from the initial conversation to an eventual disbursement may take up to two months, depending on the depth of due diligence required and how readily you furnish the required information. A typical process looks like this:

  1. Introductory Conversation: The first introductory call is like a first date, where both sides listen intently and get to know each other.
  2. NDA Signing: If the initial conversation goes well,  both sides will promptly sign a non-disclosure agreement (NDA) for the initial due diligence.
  3. Initial Due Diligence: Prospective lenders will typically request key information, including:
    • Investor Presentation: often similar to what’s used for equity funding but with additional details on what the debt raised will be used for.
    • Valuation: Furnish the annual equity valuation, including history, projections, and funding details.
    • Detailed Capitalization Table: Share ownership distribution, fundraising history, and debt utilisation.
    • Historical Financials: Ideally, supply audited financial statements covering three to five years (as available).
    • Projected Financials: Supply a linked three-statement financial model (balance sheet, income statement, cash flow).
    • Customer Insights: Offer a list of major customers, past and present, indicating customer profile, concentration, and churn.
    • Performance Metrics: Metrics that are general and particular to your industry e.g. active user growth, monthly recurring revenue etc.
  4. Analysis: The venture debt lender will conduct a comprehensive analysis using the provided data, typically within two weeks, resulting in a potential term sheet. 
  5. Term Sheet Presentation to your Board: Share the term sheet with your company’s board of directors, and getting their buy-in is a key step, involving them earlier in the process to prevent any unforeseen obstacles.
  6. Evaluation and Comparisons: If multiple lenders are involved, allocate around a week to compare and evaluate different term sheets, considering various elements and lender specialisations. Read here on how to conduct due diligence on your venture lender.
  7. Negotiations: Engage in negotiations to customise the terms for a suitable structure, potentially adjusting factors such as interest rates, amortisation schedules, and timing of fund disbursement.
  8. Final Decision: Once comparisons and negotiations are concluded, select the most fitting venture debt arrangement, which may involve equity considerations.

Thirdly, throughout this process, it is important that you have an experienced Finance manager who is conversant with building financial statements and understands what bringing debt on the company’s balance sheet means. This is because you will need to know the 4Cs:

  • Cost of financing: Review your cost of equity and the cost of debt by calculating the weighted average cost of capital to find the optimal mix of debt and equity.
  • Cap table: Understand the impact of equity and debt financing on your cap table.
  • Cashflow: Knowing your cashflow at present and the forecast for next 1-2 years ensures that the company is able to meet its debt obligation.
  • Covenants: While covenants on the terms sheets may seem restrictive at first, have a candid discussion with your lender regarding the purpose of each covenant. Ideally, the covenants should help you instill financial discipline and steer you towards sustainable profitability.

Navigating the maze of startup financing might appear intricate, yet at its heart lies a simple truth: not all financial resources are equivalent. Each startup possesses its distinct ambition, business model, and market dynamics. As a result, the blend of financing you pursue should be meticulously customised to align with your growth trajectory and overarching strategic vision. Armed with this understanding and the foundation of preliminary groundwork, you can confidently steer your startup towards a path of success.

TLDR? Download our handy Playbook for raising Venture Debt here.