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Choosing the Right Venture Lender for Your Startup

 

Venture debt is a financing tool that can help startups achieve business milestones while being minimally dilutive to founders and early-stage investors. It can be used to extend the runway between equity raises, thus buying time for early-stage startups to hit key benchmarks. When used thoughtfully, venture debt can act as a catalyst for accelerated growth.

Just as you would meticulously evaluate a potential business partner or new hire, conducting due diligence on your venture lender is just as essential to ensure a mutually beneficial outcome. The criteria for choosing a venture lender closely mirror those for choosing a venture equity partner – but with a few important distinctions, which arise from the differences between debt and equity financing.

In this comprehensive guide, we unveil the critical steps for performing due diligence on your venture debt lender, helping you forge a partnership that straps rockets to your growth.

Assessing Added Value

Venture debt is more than just a loan. Scrutinize the value beyond the dollars – delve into the lender’s value add – operational acumen, industry connections, and advisory capabilities. Just as a venture equity partner brings expertise and a strategic network, a venture lender should ideally be able to advise on the technicality of your financial statements – are you over-spending on marketing, or why are you budgeting large overheads for staff expansion. You would also want a venture lender to bring their network and experience to significantly amplify your growth trajectory. Engage in candid conversations about their involvement in portfolio companies and how they’ve contributed to success.

For instance, at Genesis, our portfolio companies are integral to our community. We actively champion them to a diverse array of investors, partners, and clients, both within the virtual realm and offline arenas. (#GenesisStories)

Through Thick and Thin

The road to building a successful startup will be long and filled with potholes. Whether the loan spans one or three years, mutual trust will be very important. Throughout your interactions, ask yourself, “Am I dealing with someone who understands how a start-up grows? Will they stand shoulder-to-shoulder with us through the good times and bad?”

So speak to at least three of their Founders; ask about their lender’s behaviour during the COVID pandemic or recent tech funding winter. A venture debt partner who stands by your side through adversity is a valuable ally in ensuring your startup’s resilience and growth.

Mastering Key Terms

Unlike a venture equity firm’s term sheet, the one from your venture lender might throw some unfamiliar terms your way that are worth understanding in advance:

  1. Interest rate: This is the loan interest rate and be sure to know if it’s “fixed” or “floating”, “flat” or “annualized”. This makes a big difference in your repayments and cash flow.
  2. Duration of loan: This is typically one to three years depending on the working capital requirement and the venture lender’s fund life. Generally, longer-term loans are attractive as they allow more time for the capital to work and generate a return.
  3. Interest-only period: Given the cash-burn profile of startups, you can negotiate with your lender to defer paying the principal while servicing only the interest payments for an initial period of 3-6 months. In return, the lender may ask for additional upside, for example, more warrants or higher interest rates etc.
  4. Warrants: Warrants give the lender the right to purchase equity shares at a predetermined price at a future date. This usually amounts up to 20% of the loan principal amount. 
  5. Fees: There are several fees that Founder’s should be aware of e.g. origination fee, legal fee which are typically mandatory and then there are other fees such as “Unused fees”, or “Closing fees”, that are in addition to interest payments.
  6. Prepayment Penalties: In the happy event where your cashflow is more positive than forecasted, you may wish to pay off your debt early. Examine the penalties for early payment and there are may be creative ways to structure these penalties to mutual advantage e.g. a sliding scale expressed as a percentage of the loan as the loan period draws to a close.
  7. Covenants: are “stress tests” that companies must meet e.g. minimum working capital, EBITDA, or revenue etc. Have a candid discussion with your lender regarding the rationale behind each covenant. Usually covenants are not meant to be putative in nature but to ensure that the startup practices financial discipline.

Due Diligence on Due Diligence

Finally, take a moment to find out how the lender conducts its own diligence. Inquire about their due diligence process, including the depth of research, the rigor of analysis, and the criteria they prioritise. A thorough, systematic approach to due diligence indicates a commitment to informed decision-making, which will serve as a strong foundation for your partnership.

TLDR? Here’s our playbook on doing due diligence on your venture lender.


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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.


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The entrepreneurial journey is often romanticised with tales of heroic successes, but, in reality, it can be surprisingly solitary. While some successful companies have started with only two or as many as eleven co-founders, there are also numerous solo entrepreneurs who achieve remarkable accomplishments. Yet, finding a compatible co-founder can be elusive, leaving determined entrepreneurs with a crucial decision to make: go it alone or let the opportunity slip away.

As venture investors, Genesis has had the privilege of engaging founders from diverse backgrounds, building connections that stretch as far back as 2015. Throughout the years, we’ve witnessed these founders endure a rollercoaster entrepreneurial journey, braving challenges like Covid and equity winters, and, of course, embracing triumphs.

Now, we are thrilled to present our Founder’s Playbook series, a collection of curated insights and experiences gathered from these remarkable founders. This series serves as a treasure trove of wisdom, where seasoned entrepreneurs share their valuable knowledge and hard-earned lessons with the startup community.

Whether you are a budding entrepreneur navigating the early stages of your venture or an experienced founder seeking guidance in uncharted territories, our Founder’s Playbook offers a reservoir of practical tips and inspiration to fuel your own journey. Embrace the knowledge shared within and join us in fostering a community of support and growth, as we continue to shape the future of entrepreneurship together. Do get in touch with us should you be interested to share your own war stories with the founder community.

Meet Niles Toh, the solo Founder who launched FoodRazor in 2015 as a SaaS business revolutionising F&B procurement and accounting processes. His first job fresh out of university was with a B2B SaaS company in 2014, managing regional sales and business development. It didn’t take long for Niles to see the potential of B2B SaaS as a profitable business model, sparking his desire to start his own venture. His father frequently shared his experiences dealing with inefficiencies in the F&B supply chain, which sparked the idea that this was an area where he could build a solution. Efficient ordering processes for ingredients are vital for a restaurant’s success as they directly impact the quality and consistency of the dishes served. By streamlining and digitizing this process, restaurants can optimise costs and reduce waste, while ensuring a delightful dining experience for their customers. This motivated Niles to start FoodRazor to address these issues.

 


 

Niles’ Journey in his own words

Being a solo founder came with its own trials and tribulations. One of the central challenges I grappled with was the limitations in my expertise and the sheer lack of bandwidth. In hindsight, I realized the immense value and strength that a co-founder could bring to the table. Initially, I had a co-founder, who unfortunately had to leave after a year due to personal financial concerns. As we were self-funding the business at that time, we couldn’t offer the stability he needed. This valuable lesson guided my approach when starting my current venture, SuperTomato, where I have the privilege of working alongside a dedicated co-founder.

Reflecting on my journey as a solo founder, I’ve identified some key aspects I would have done differently:

Seeking a Co-Founder from the Outset: I started with a co-founder who has the technical skillset that I am lacking. When bootstrapping a company, I think it’s more important to find a co-founder with both financial resources and time to commit to the long haul. The journey often takes more time than anticipated, so having someone dedicated to the process is vital.

Building a Strong Support Network: As a solo founder, the road can be isolating, and at times, overwhelming. In retrospect, I would have actively sought out and built a robust support network of mentors, advisors, and fellow entrepreneurs to share experiences, gain insights, and stay motivated.

Expanding beyond a Domestic Market: Initially, I thought we should concentrate on Singapore and establish a strong presence here before venturing abroad. However, I have come to realise that it would have been more beneficial for us to go global right from the start and allow our paying customers to direct us toward the most promising markets for expansion. Waiting for the perfect moment to be “ready” will only hold us back.

Methodical Fundraising Process: As a founder, it’s crucial to dedicate sufficient time and effort toward identifying suitable investors. This is particularly important for new entrepreneurs who lack working experience and require more guidance. It’s essential to identify an investor who can offer valuable advice and serve as a reliable sounding board, especially during the initial stages of your entrepreneurial journey.

I wish every Founder much success in their endeavours!

 


 

In June 2021 after six years at the helm, Niles made the difficult decision to exit FoodRazor. There was a buyer ready to take over the business and he recognized that he had reached a point of burnout and no longer felt he was the right person to lead the company. 

Nonetheless, his unwavering passion for solving complex problems has been reignited after a much-needed break to re-energise himself. He has since embarked on his second startup, SuperTomato.ai, a hardware-focused venture which is already profitable. This time, Niles is joined by a co-founder who is a serial entrepreneur who has started multiple successful businesses. The presence of a co-founder has made a palpable difference, providing essential support and even sparking the inception of a third startup, MonsterBuilder.ai, which emerged from SuperTomato’s requirements. 

Overall, Niles would summarise his mantra as “Think Big, Start Small, Go Fast!” and the startup journey, though challenging, is fulfilling and rewarding. Follow his journey on LinkedIn

 

Reporting by Nicole Lim, Investment Analyst Intern, Class of 2023.