Venture Debt

“The notion that a financial instrument kills a company is false. Founders kill companies, and boards kill companies. The people who hold responsibility are the decision makers in the company.”

“Venture debt is underwritten against your next venture raise. It's not underwritten against anything else.”

“It's just the real dangers of adding a big slug of venture debt on top of a slow-growing business. You just end up trapped. You put your equity at risk, and you end up with a cap table which is very misaligned.”

“Certainly don't do debt instead of an equity round. That's the sucker bet, right? It's just, you better be the hottest thing on planet earth or it's gonna kill you.”

“I've never seen venture debt work well to improve the quality of a business. Never. Never. It doesn't work. Only, only, only ever seen venture debt... That damaged companies And if you get the venture debt, you can never actually use it. So the venture debt in…”

“It is really tailored for being put alongside an equity raise. That's where it really makes a lot of sense. If you're at three million in ARR and you want to get to five before you fundraise, you can pull a million bucks and you're kind of going for broke anyw…”

“Well, I think venture debt. Or any sort of debt works really well when you figured out your unit economics around customer acquisition. If you haven't necessarily figured out your unit economics around customer acquisition, I think it can be a bit daunting for…”

“They work more with loans. They work with venture debt more than I think digital companies do.”

“Companies that were raising money in the 18 to 24 month cadence that raised money in 21, 22, right? At higher multiples are coming up for raising capital now in the equity markets, and they're seeing their multiples compress quite a bit. So Debt has become a s…”

“Typically from when our capital comes in, we will only fund businesses with a fully funded business plan with our capital, right?”

“If you're going to get ventured at, you probably have to have raised around within the last quarter or two.”

“And it's worth noting that the way they size kind of their facilities is as basically a percentage of the equity round. Again, back to 10, three, they may lend you a third, 25% to a third of your Equity round.”

“Anyone who's going to try to refinance you and help get you out of that position is oftentimes going to look at you on a, lever you on a revenue basis. So if you raised ten million bucks, but you only got, and you took three million, but you only got to two or…”

“I think the cases where I don't love it is, you know, you're some AI company that's not making any money today, and you want to, like, go extend your extend your kind of fundraise and runway by, like, 20% or something. I think in those situations, like, when y…”

“So yeah, it doesn't come with dilution, but it does come with more strings attached. So even though I don't even have financial covenants, as I said, you still can't just go out and go create new entities and go buy other companies without our approval.”

“I don't see venture debt a whole lot on the VC side because the venture capitalists don't like venture debt. They like to, you know, have their positions, you know, without any issues there.”

“Part of my argument is if you're, if you raised four or five million from a VC, your seed raise, whatever, and you can get an extra one and a half million dollars, it increases the likelihood that you'll survive to raise your A round. Because chances are you'l…”

“As far as debt goes, we haven't seen it. We've seen people be able to raise debt at the corporate level via, via venture debt or via corporate debt. Now, those are very low leverage numbers, right? They're not the 80, 95% that, you know, you will get in solar.”

“Months, months. And then they want to meet the founder and they want to like, you know, look at all your books and everything. Like, so it's just like slightly less painful than doing a bonafide like venture round.”

“Moreover, I always try to talk founders out of taking venture debt, whether from SVB or elsewhere.”

“The asset as a, as an asset class, we can make fun of it all we want. It's actually performed pretty well. These guys have generated typically 18% as an industry.”

“I believe that the data for all these models is, is skewed because it assumes again, an environment in which companies keep raising up rounds. And as soon as you get into a crisis in which that breaks, then the whole asset class breaks.”

“You can't use customer, customer deposits to do some CLO deal or to do like, you know, to back a PE play. These are all LP capital that goes towards that. This is the only sliver, as far as I know, where you take customer deposits to create very risky loans wr…”

“If you look at SVB's loan portfolio, 70% are really these asset-backed loans, which are 56% of the portfolio is like, you know, pre-payments on, on LP commitments, and then 14% is private banking loans, which is loans against, you know, public securities that …”

“I philosophically think that debt on any venture company is a disastrous idea, particularly in times like this, because the banks are not going to be patient.”

“But that creates an overhang on the next round because the new VCs coming in, They want their money to go into the company, not paying off a bank. So it actually makes the next round less attractive.”

“For me personally, I would rather not give up the warrants, you know You know cause you know, I mean, the whole purpose of debt is that you that you try to limit, you know, but it depends on how big the warrants are and what kind of a partner it is. I wouldn't…”

“When you do that as an entrepreneur, you've got to be of the belief that the value creation you're going to be able to do, because again, the thesis here is that you're using that debt to really accelerate sale. You know, you're not using it for product develo…”

“Venture debt or revenue based financing, but it should probably be the last resort because it'll add a lot of risk to your company. So if you do that and things Don't work out, then basically the bank owns your company by the time you have to pay back.”

“Venture debt is just a tool to underwrite the venture firms.”

“Now, if it's a matter of dilution, or if it's a matter of wanting to cheapen your cost of capital, that cost Savings. Typically it's to the founder and not to the company. If I, as a founder raise equity, I'm diluting my shares. If I, as a founder raise debt, …”

“This is a blanket sort of summary, but it's typically a term loan with a tenure of somewhere between two to three years. What that basically means is that we provide the capital upfront and it gets paid back essentially on a monthly basis, principal plus a lit…”

“And what we've realized is that companies that don't deleverage, let's say you borrowed five million, prefer to pay Five million all at one shot after like two years or three years. That takes away from the allure of a company in the eyes of potential future i…”

“So essentially what you are doing is you are leveraging the dollars that you bring in as a founder to unlock Even more capital to bring you nearer term value such that when you need to go out to market again, you incorporate that value into your valuation, for…”

“That's always cheaper than equity. If you think you're going to be successful, that is always cheaper.”

“Our view is we, on the debt side, if we can avoid litigation, NCLT, bankruptcy, et cetera to do settlements as much as we can, to do restructuring if required, give people, founders more time. If they're good founders, if you haven't funded a fraud you will ge…”

“This will be a two million dollar loan with a initial 12 month interest only period. Fairly high interest rate, but we're staying away from warrants.”

“That space we feel is a little bit crowded and getting competitive.”

“We started positioning ourselves on that the dead side to become your working capital partner, and use the money for creation of assets, whether that is business assets, KPEC assets, or even your working capital, and you use your equity money for burn, and you…”

“In venture debt space itself, though we have given four 50 crores to date, we have already got more than 250 crores already back. In terms of, you know, repayments on the principal side.”

“The IRR on those transactions is much higher because you also have fees etc on it and your principal also starts coming back. So the IRR can range from 16% to 21% plus in some cases you will get warrants.”

“I think US it's already like a 12 to 15% of the VC market size. In India that will be like almost five to six percent only so we have a big headway on that side itself in terms of the expansion of the market”

“You can leverage about depending on the strength of your business, somewhere between .8 and 1.2 times your AR, and we can flex up a little more.”

“Now, actually, if you see broadly Siddharth, the ecosystem in India for venture debt, it's very underpenetrated. If you see in the West, it's a very, very mature market. There's a significant venture debt to venture equity presence. Whereas in India, it's stil…”

“If you look at West it's a, It has, like, 10 to 12% of the market cap to venture debt in terms of funding a lot of companies.”

“What I mean by that is only if you would know how to take, so let's say Forex, your current MRR. So let's say you knew how to take a 120 grand today and land more than like 10 K a month in new revenue sometime over the next six months with that 120 K. Only if …”

“Venture debt, the banks that we work with only give you venture debt if you're after a series A.”

“We're looking into venture debt as we speak. So we actually looked at equity for our series A for our future development that we are really interested in venture debt for, especially for everything relating to maybe acquisitions looking into maybe expanding.”

“I think deck makes a ton of sense if you have more than a few variables that have already been answered to. And you only require growth capital in order to just fuel the rocket and drive it forward.”

“I had some thought and experience exchange with other founders who did venture depths, and as soon as they cross or match and miss some of the important KPIs, these players might become really, really stressful.”

“Venture lending flew in the face of everything that we knew as a bank. As the underlying trade principles of how you lend to corporates. It didn't work. You had companies that were burning cash. You had companies that had no quote unquote valuable collateral.”

“So in a sense, we think of venture debt as a way to extend the cash flow runway for the company involved. And in a way it helps to protect dilution and valuation.”

“So the debt is generally structured as a medium term loan. It's two years to three years depends with every structure. The loan is always a monthly repayment and monthly amortization, and the intention of that is to lower the burden on the company.”

“Our, you know, underwriting really starts with looking at, you know, who the investors are and you know, how much has gone into the company? How deep are the investors pockets to keep supporting the company when they need it? What is the path forward for the c…”

“For us on the debt side it's not so important to be able to see, look out five years and pick the winners. That's not how we would underwrite. How we would underwrite is we need to necessarily be more short term in how we think about the next round coming toge…”

“Sometimes VCs do want to play, ah, in, in, in spaces where they have to explore certain models which are emerging, ah, but there is still some time to go before those models are approved, and, you know, that's not a risk that should be, ah, leveraged, in my op…”

“The two safest times to lend in our opinion are one is when the company is a large, you know, it's a mature adult, and the other time is when it's a small startup that is working very closely with the VC and being protected by the VC.”

“There's a leverage limit to what the venture debt people will give you, and then you can generally get more debt from a mezzanine provider, and you'll pay a higher, much higher rate of interest, maybe three or four times what you pay on the venture debt, but y…”

“The ratio of venture debt to money in the bank that you have, it's really a insurance policy and it extends your runway a little bit, but it can really come back to bite you. Depending on like a few different scenarios, how it ends and things like that. Well, …”

“So I would definitely tell anybody listening, if you're going to do debt, make sure it's covenant free, not covenant light, like covenant free.”