On August 25th, Shoobx conducted a webinar titled “Early Stage Growth Financing: What Is It? Should Your Company Leverage It?” Shoobx was joined by Brendan Syron, Director at Triple Point Capital, and Ruslan Sergeyev, Senior Vice President of Venture Debt at Pacific Western Bank (PacWest), to share lessons for emerging companies seeking to take their company to the next stage of funding.
Venture debt can be an intriguing tool for companies that have just completed an equity raise or are preparing for one. Understanding the ins and outs of the venture debt financing process is key for any entrepreneur considering this form of early-stage growth financing.
Shoobx tapped into Brendan Syron and Ruslan Sergeyev, two experts in the venture debt space, to provide guidance to entrepreneurs. Syron and Sergeyev offered answers to some frequently asked questions in Shoobx’s recent webinar.
What is venture debt?
Venture debt is a form of debt financing offered by lenders including venture banks and specialized debt funds focused on the venture ecosystem. It’s designed specifically for early-stage, high-growth companies.
It’s estimated that venture debt makes up roughly 10% of the venture market – a sizable percentage that is likely to increase. This financing option represents capital that is loaned to equity-backed companies (and paid back to the lender with interest) as a supplement to equity financing.
Venture debt allows companies to take on loans that follow their equity model while enabling founders and early investors to avoid dilution. The practice was popularized in the 1980s to allow companies that lack physical assets and cash flow to secure credit facilities.
Syron believes that private companies often get laser-focused on equity financing, ignoring how venture debt is another way to get the resources they need.
“Most entrepreneurs are really focused on their equity financing and getting through those hurdles from Series A to B to C,” Syron added, but followed up by pointing out, “Venture debt can play a useful role in helping companies scale and increase their growth rate, from both the company side and an enterprise value side.”
Who should leverage venture debt?
According to our panelists, companies engaging in Series A through D funding make the best candidates for venture debt. Pre-seed companies with strong backing from VCs are also potential venture debt suitors.
When meeting with emerging companies, entities like Triple Point Capital and PacWest examine three key pillars to determine how a venture debt arrangement could work:
- The investor and investor syndicate involved with the deal (Think: previous VC connections)
- The stand-alone profile of the business (What market are they in? SaaS? Consumer? IOT? Financial growth rate? Key metrics?)
- Liquidity position (a company’s ability to pay its current liabilities, its debt capacity, and overall cash runway before any debt is included)
“Depending on how all of those shake out, that's how we really think about the lending relationship, how deep we can go, and the structures that we do,” Sergeyev said.
Typically, companies in more capital-intensive industries (frontier tech, e-commerce, and biotech) or industries with regulatory requirements for capital (financial tech, insurance tech) are most likely to seek out venture debt. However, any company seeking extra capital outside of their equity strategy could also utilize venture debt to top off equity rounds with additional liquidity, or add an insurance policy to the balance sheet (this is most common for SaaS profiles coming off of large equity rounds).
“Regardless of what sector you're in, if there's any desire to pour money into something that wasn't part of the equity plan – whether that be R&D, sales and marketing, acquisitions, funding a new business line, or just having that insurance to extend runway – those are all really strong use cases for debt,” Syron said.
How does venture debt work?
Once a company identifies a need for venture debt, the process can be quick. It might only take 4-6 weeks to get your capital.
At PacWest, Sergeyev’s team starts with a kick-off call to evaluate the three factors outlined above. Usually, it takes just a week to get feedback on the structure. The remainder of the time in the 4-6 week window is used for diligence, and ensuring each side’s legal counsel is aligned.
As a baseline, Sergeyev recommends companies take on debt equivalent to roughly 30% of their most recent equity raise (most likely a Series A through C).
“There are a lot of factors that impact that number,” Sergeyev said. “But 30% is generally the rule of thumb.”
When should my company explore venture debt?
The old cliche “striking while the iron is hot” has relevance for the timing of a venture debt raise. Optimally, a company will seek out venture debt when they’re coming out of an equity raise. If your company is preparing for a raise, you can also take on venture debt in parallel. At that time, companies have more cash on their balance sheet and can leverage that to achieve increased flexibility.
“Things are obviously looking pretty good from a financial perspective and that's when you're going to get the best terms and structure,” Sergeyev added.
Shoobx is here to help
Shoobx is reshaping how private companies get started, raise capital and exit. Our mission is to reduce friction in the entrepreneurial ecosystem by raising the bar for cap table management and making venture financing simpler.
By focusing on data integrity and risk reduction, our platform streamlines everything from employee onboarding to issuing equity grants and maintaining a dynamic cap table. All of this enables companies to grow rapidly while staying financing–ready. Our clients have raised billions to fund their growth, and the majority have gone through series A and B rounds.