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Nov. 25, 2020

Venture Lending and Venture Debt

Venture Lending and Venture Debt

This blog post is based on a conversation we had with Troy Zander for the fundraising radio podcast.Troy Zander is a partner at Barnes & Thornburg LLP. He is the partner in charge of the San Diego Office, and the head of the firm's venture lending practice group. Troy has been a practicing lawyer for 25 years. He started as a bankruptcy
lawyer, but now represents venture lenders, which primarily lend to technology and life science companies. Moreover, Troy also represents the venture capital and private equity companies that support them.

About venture lending and venture debt:

Troy explains that venture lending or venture debt is a type of financing
arrangement that is typically provided to early and growth stage venture backed
companies. Even private and mature companies can take advantage of venture
lending. However, it is not as common. There are different types of venture lenders as: banks and non bank or fund
based lenders. Troy notes that each type of venture lender prices his product differently. For instance, a bank might offer a lower cost of capital (lower interest)and a non bank lender typically has a higher cost of capital. Additionally, a bank and a non bank lender will have different terms.

The difference between venture debt and venture capital:

- The provider of the venture debt expects to be repaid (with interest and
ahead of other creditors), while the providers of venture capital are looking for a
return on investment;
- Venture lenders usually do not require equity in exchange for capital,
whereas venture capitalists do.

Revenue based funds vs Venture Lending:

Moreover, Troy also compares revenue based funds and venture lending. In
fact, he pontificates that revenue based funds are a subset of venture lenders and
are typically non bank lenders.

Three things Venture lenders examine before making a deal:

In addition, Troy outlines the three things venture
lenders examine before making a deal:

1. The investors backing the company;
2. The management team;
3. The product or service.

 

When should startups raise venture debt:

Troy advises that a company is best positioned to raise venture debt in
connection with an equity raise. Specifically, bridging the gap between equity
rounds with venture debt. Moreover, he also suggests that venture debt could also
be used to fund capital expenditures. Sometimes more mature companies raise
venture debt before going public, in an attempt to pretty up the balance sheet and
to put them into a more favorable position for the capital markets. Additionally,
mature companies raise venture debt for acquisitions or for a marketing campaign.

 

Defaulting on Venture Debt:

Troy also touches onto the topic of defaulting on venture debt. Venture
lender does not want the company's assets and the recognizes that every early stage company will be off plan which makes the lender be flexible with the borrower. Especially during this CoronaVirus induced economic crisis. During this crisis lenders will be more inclined to help companies restructure their debt.
However, it does not mean that the lender will walk away from their rights once a
borrower defaults on loan.Troy also outlines the different types of defaults. For example - late on
payment defaults, complete inability to repay, and foot faults, which are when
companies fail to timely deliver their compliance certificates. He also expounds on
the fact that the worst case scenario of defaulting would be bankruptcy or
foreclosure or seizure of company assets. Now a plethora of defaults are occurring,
due to the COVID-19. Recommendation: to have open and honest communications with your
lender and all your business partners, so they’ll be more willing to offer payment
referrals.

Mr. Zander also explains the common mistakes entrepreneurs make when
raising venture debt:

-  He states that the company should reflect and ask themselves
if they really need the money the venture debt provides, because in many cases
they don’t.
- Another mistake a company can make in regards to raising venture debt is
incorrectly negotiating the terms and the size of the venture debt.
Troy also encourages companies to look out for the fees certain venture
lenders charge.

Advice for what venture lenders want to see on your pitch deck:

When scrutinizing an investment, Troy likes to see certain things on a pitch
deck:
- For instance, he wants to know the challenge and problem that is going to
be addressed and the solution;
- Moreover, he enjoys seeing an explanation of why the solution is different
and better than anything else out there.
- The investor also has to have some resonance with the company.
If these things are included in the pitch deck, there is a higher probability
that Troy’s clients will invest.

blog pst written by: Luis Bravo.