2024 marked a record-breaking year for U.S. venture debt deals, which reached $53.3 billion in investments, up 94% from 2023. This surge isn't coincidental. Later-stage startups are increasingly turning to venture debt as they struggle to keep up with growth expectations from VCs, and as a way to avoid raising equity financing at lower valuations.
But raising venture debt isn’t just about securing capital; it’s about timing and execution. Misstep, and you could end up with cash flow headaches, or worse. Do it right, and you’ll extend your runway while holding onto more equity for yourself and your team.
Here are seven common mistakes founders make when raising venture debt—and how to avoid them.
One of the first questions a founder asks is, "How much venture debt should I raise?" It's an important decision, and yet getting the loan size wrong is one of the most common (and costly) mistakes founders make.
How to get it right:
When you’re evaluating term sheets, it’s easy to focus only on the interest rate. But your venture debt provider isn't just a bank, they are a long-term partner who will hold a senior position in your capital structure. Their reputation matters as much as their rates.
New lenders may offer attractive, low-cost term sheets to win business. The risk is that they may not have experience supporting companies through challenging periods. When a downturn hits, an inexperienced lender might panic, creating more problems for you.
Lenders with a long history in the market have weathered economic cycles. They have a reputation to protect and are often more skilled at working with companies to find solutions when things get tough.
A low interest rate is tempting, but it often comes with a hidden cost: a lack of flexibility.
Traditional banks, for example, may offer single-digit rates. But these loans usually come with strict rules called covenants, and works only if you just want a cheap insurance policy on your balance sheet.
But if you need flexible growth capital to invest in product development, hiring, or sales and marketing, a specialized lender is often a better fit. They may be more expensive, but their terms are designed to support growth, not restrict it. They understand early-stage businesses and are more focused on your long-term success.
The core purpose of venture debt is to give you more time: time to grow, time to increase your valuation, and time to strengthen your position before your next equity raise. A short repayment schedule undermines that goal.
Pay close attention to two key periods:
Venture debt is not a rescue tool. If your company is struggling to survive and you need cash for payroll, that's a high-risk situation better suited for your existing equity investors.
Lenders won't price emergency funding attractively. If they offer a loan at all, they'll protect themselves with restrictive covenants and high warrant coverage that make the deal expensive.
The right time to raise venture debt is when things are going well. It’s fuel for a well-running engine, not a patch for a leaky one. Use it to press your advantage, extend your runway from a position of strength, and accelerate your growth.
Nearly all venture debt deals include warrants, which give the lender the right to buy a small amount of your company’s stock in the future. This is how the lender gets a small piece of the upside for taking on risk.
The key is to understand how much equity you are actually giving up. The warrant coverage is typically 5% to 30% of the total loan amount. For a $5 million loan, that might mean warrants to purchase $250k to $1.5 million of stock.
While this does introduce a small amount of dilution, it’s a tiny fraction compared to a full equity round. Be sure to model the impact of warrants, but don’t let them scare you away from a good deal that helps you avoid significant equity dilution from a VC check.
Business is never a straight line. You will have good quarters and bad ones. The biggest mistake you can make during a tough period is to stop communicating with your lender.
Silence is a red flag for any capital partner. It makes them assume the worst.
Instead, be proactive. If you anticipate a challenge or miss a forecast, get on the phone with your lender. Explain what happened, what you’re doing to fix it, and what your revised plan is.
Open and honest communication builds trust. A lender who trusts you is far more likely to work with you on solutions, such as temporarily modifying covenants or extending an interest-only period. They want you to succeed, but they can't help if they're in the dark.
1. Should I raise venture debt instead of a down round?
If VCs are demanding 100-200% growth rates you can't hit, debt lets you extend runway and prove your business model without accepting a lower valuation. The key is being honest about your growth trajectory. If you need 18 months to hit profitability instead of 12, venture debt can bridge that gap. Just remember: debt must be repaid, so only use it if you have a realistic path to either profitability or a future equity round at better terms.
2. What specific financial metrics should I prepare before approaching venture debt lenders?
Lenders often want companies with 9-12 months of runway and a path to profitability. Prepare: (1) Monthly recurring revenue (MRR) trends for the past 12-24 months, (2) Cash burn rate and runway calculations, (3) Revenue projections for the next 24 months with clear milestones, (4) Details of your last equity round (amount, valuation, investor quality), and (5) A specific use-of-funds plan. Lenders especially want to see predictable revenue streams, so highlight any contracted or subscription revenue.
3. What happens if my company can't repay its venture debt?
If you foresee trouble making payments, your first call should be to your lender. Don’t wait. A good partner will want to find a solution, not push you into default. Options may include extending the interest-only period, restructuring the loan terms, or working with you and your equity investors on a plan. Default is a last resort, as it can give the lender control over the company’s assets. This is why choosing an experienced, founder-friendly lender is so important.
4. What are venture debt covenants?
They are conditions you must meet, such as maintaining a certain level of cash in the bank or hitting specific revenue targets. If you break a covenant, the lender can demand immediate repayment.
