As a founder, the challenge is constant: hiring, marketing, product development—these all require cash. But giving up 20–25% ownership for a Series B before you’re ready can feel painful, and a traditional bank loan might not fit your high-growth, asset-light model.
This is where many founders start exploring other options, like venture debt. This article answers the key questions founders have, helping you decide if it’s the right choice for your company.
What Is Venture Debt and Why Should I Care?
Venture debt is a loan designed for high-growth companies, often backed by VCs. Instead of relying on profits or hard assets like a traditional bank, lenders focus on your growth potential and investor backing.
- Minimally dilutive: Most deals only include 0.5–2% in warrants, compared to 15–25% equity dilution in a VC round.
- Founder-friendly timing: It lets you extend runway, accelerate growth, or bridge to a higher-valuation round.
- Flexibility: Capital can be used for growth projects, acquisitions, or simply to buy time to hit your next milestone.
How Venture Debt Differs from Other Funding Options
It’s easy to get these confused, but they serve very different purposes.
- Bank Loans → Banks are risk-averse. They typically want to see years of profitability and tangible assets (like buildings or inventory) they can use as collateral. Most high-growth SaaS startups don’t qualify.
- Venture Capital (VC) → VCs buy equity. This is great for big leaps but comes at the cost of ownership and control.
- Venture Debt → Sits in the middle. It offers more capital than a bank might, with more flexible terms, but without the dilution of VC funding. It must be repaid, but if used well, it increases your company’s value before the next raise.
When Is the Right Time to Raise Venture Debt?
Venture debt works best when tied to a clear growth plan. Common use cases include:
- Extend runway: Add 6–12+ months to hit milestones that boost valuation before your next raise.
- Fund growth projects: Hire a sales team, expand into new markets, or launch a marketing campaign.
- Bridge to a future round: Smooth timing gaps between equity raises, signaling strength to investors. PitchBook shows venture debt has become an increasingly popular tool for this very reason, as it helps founders maintain momentum in a tough fundraising climate.
- Finance Acquisitions: Acquire a smaller company without issuing more shares.
How Does Venture Debt Work?
Closing a venture debt deal is faster than raising equity. Expect:
- Initial conversations → Share your growth story, metrics, and funding needs.
- Due diligence → Lenders review ARR, churn, retention, and your plan to repay (through cash flow or future raises). They want to see a clear path to growth and your ability to repay the loan, either through cash flow or a future funding round.
- Term sheet → Outlines loan size, structure, and key terms. This is where negotiation matters.
- Final diligence & funding → Legal, cap table, and team review. Deals typically close in 4–8 weeks.
What Are the Risks of Venture Debt?
Venture debt is not free money—it’s a loan with obligations. The key risks are:
- Repayment pressure: Regular payments can strain cash flow if growth slows.
- Covenants: Lenders may require minimum cash levels, growth targets, or approval for major decisions. Breaching covenants can trigger default.
- Dilution (small but real): Warrants are far less dilutive than VC equity, but they still affect the cap table.
What Should Founders Watch for in a Venture Debt Term Sheet?
Don't just focus on the interest rate. A venture debt term sheet has several moving parts. Here’s what to look for:
- Loan size & draw schedule → Can you pull capital when you need it? Can you avoid paying interest on unused amounts?
- Interest & fees → Is the rate fixed or floating? What extra fees (setup, monitoring, prepayment) are included?
- Interest-only period → How long before principal repayment starts? Can the period be extended if milestones are met?
- Warrants → What % of equity does the lender get? How is the strike price set, and what happens in an exit?
- Covenants → What financial targets must you maintain? What happens if you miss them—do you get a cure period?
A good lender should be a partner, not just a creditor. Always ask for founder references.
Founder FAQs
1. How fast can venture debt close?
Most deals take 4–8 weeks. Well-prepared companies with strong materials can move faster.
2. What covenants should I expect, and what happens if I miss them?
Common ones include minimum cash runway, limits on new debt, or revenue/burn targets. Breaches can trigger repayment acceleration, so negotiate cure periods or waivers.
3. What’s the “real” cost beyond interest and warrants?
Expect origination fees (1–2%), legal costs, and sometimes monitoring or prepayment fees. The total cost of capital is slightly higher than the headline rate.
