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What is Venture Debt? (The Strategic Bridge for High-Growth Startups)
Startups move fast. And sometimes, they need capital between funding rounds without giving up more equity.
That’s where venture debt comes in.
This non-dilutive (or minimally-dilutive) financing option gives venture-backed startups access to strategic capital, typically alongside or shortly after a traditional Venture Capital (VC) round. It is a powerful tool used to extend runway, fund hyper-growth, or strategically manage capital stack risk.
Unlike traditional commercial loans, venture debt doesn't require established positive cash flows or hard assets as primary collateral. Instead, lenders underwrite based on your existing VC backing, your business model's growth trajectory, and your ability to raise future equity capital.
In this guide, you’ll learn:
- What venture debt is and its critical role in the capital stack.
- The Venture Debt Deal Structure: Interest rates, warrants, and covenants.
- The Strategic Use Cases: When to use it to optimize your valuation.
- Deep Dive into Lenders: Understanding the private vs. government funding landscape.
- The Founder’s Toolkit: A systematic framework for evaluating and negotiating terms.
Definition: What is venture debt?
Venture debt (or venture lending) is a type of secured debt financing specifically tailored for early-stage, high-growth companies that have already secured institutional venture capital. It functions as a specialized, non-dilutive complement to equity financing. It is often used by startups and companies that have already received venture capital funding and wanted to grow further. Therefore, it is also called growth capital.
Venture debt is typically structured as a term loan (a lump sum with a set repayment schedule) or a revolving line of credit. The repayment period usually spans 1 to 4 years, aligning with the typical time horizon between VC funding rounds.
Venture Debt Follows Venture Capital (VC)
Venture debt providers are, in essence, making a calculated bet on the credibility of your existing equity investors. They require a solid foundation of VC backing because:
- Risk Mitigation: The VC money serves as a "liquidity buffer," signaling the company can survive for the duration of the debt.
- Valuation Anchor: The most recent equity round establishes the company's valuation, which the lender uses to justify the loan size and warrant strike price.
- Repayment Source: The most likely repayment event is the closing of the next, larger VC round.
Since a VC round is a massive undertaking that dilutes founders, using venture debt allows a company to secure non-dilutive financing to reach the next milestone, justifying a higher valuation in the subsequent equity round and minimizing the overall dilution effect on founders.
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Calculate funding termsThe Venture Debt Deal Structure: Key Terms
While the interest rate is a clear cost, the true cost and complexity of venture debt lie in the "deal sweeteners" and protective measures put in place by the lender.
1. Interest Rate
Venture debt interest rates are significantly higher than conventional bank loans, reflecting the higher risk of lending to an unprofitable, high-burn business.
- Typical Range: 8% - 15% per annum, sometimes exceeding 20% depending on risk and market conditions.
- Structure: Loans often begin with an Interest-Only period (6 to 12 months) to reduce the immediate strain on cash flow, followed by a period where both interest and principal are paid. This crucial structure extends the cash runway.
2. Warrants (The Equity Kicker)
This is the primary way lenders gain an "upside" in exchange for taking on high risk.
- Definition: Warrants give the lender the right, but not the obligation, to purchase a specified number of the company’s shares at a predetermined price (strike price) for a set period.
- Cost of Debt: Warrants act as a form of "synthetic equity" and dramatically reduce the lender's effective risk. The warrant value is negotiated as a percentage of the loan amount, typically $\mathbf{1\%}$ to $\mathbf{5\%}$ of the principal.
- Dilution Impact: While non-dilutive at the time of the loan, warrants become dilutive upon exercise (usually upon acquisition, IPO, or the next equity round). Founders must model this carefully.
3. Covenants and Control
Covenants are conditions in the loan agreement that protect the lender. Unlike VC investors who actively influence the company through board seats, venture debt lenders use covenants to passively control risk.
The Risk of Default: Breaching a financial covenant (e.g., dipping below the minimum cash balance) constitutes a technical default. This gives the lender the right to accelerate the entire loan repayment, immediately forcing the company into an urgent and often desperate financial situation.
4. Security and Seniority
Venture debt is usually senior to all equity. In the event of a liquidation or insolvency, the venture debt provider is paid back first, ahead of all preferred and common equity investors (including the VCs). This ranking is a critical protective mechanism for the lender.
The pros of venture debt
- Startups gain access to debt capital.
- Venture debt can ensure that there is less dilution.
- Venture debt ensures that startups can continue to finance their growth.
- With the help of venture debt, startups can overcome financial bottlenecks (extend their runway) and use this extra time to reach important milestones and further develop their business.
- Venture debt can help startups to achieve a better valuation for the next equity round.
- Venture debt has repayment terms of up to several years.
- The disbursement of the debt capital can be structured as a credit line in two phases: In the first phase, interest is paid (interest-only), and in the second, interest and principal are paid. This structure relieves the cash flow of a startup.
The cons of venture debt
- Venture debt providers cover their risks well. It means higher costs for startups. The costs are driven by three components:
- Upfront payments after the closing of the venture debt deal.
- Interest rates are higher than conventional loans and range from 8% to 15%, sometimes even more than 20%.
- Warrants give venture debt investors the right to buy shares in the company at a certain price.
- Warrants mean that there is a dilution of shares. Investors get co-determination rights and can actively influence the company. It limits the control of founders.
- Some venture debt agreements come with an equity kicker. It's a provision that allows the venture debt lender to convert some or all of their loan into equity at a predetermined price. This gives the lender an additional stake in the company's success.
- As with a VC investment, venture debt can take a long time. In the European Investment Bank's own words, up to nine months. That can be a problem for startups with an urgent need for capital.
- Regardless of how a startup develops: It needs to pay interest on its venture loan. Startups may find themselves in a position where they cannot repay the loan within the agreed-upon timeframe.
- If interest or repayment installments cannot be paid, venture debt lenders can impose surcharges or, in the most extreme case, cancel the contract.
- Venture debt is given priority over equity investors, e. g. in the event of insolvency, the lender's claims are settled first.
Types of venture debt financing
As an alternative financing instrument, venture debt is available to startups in various forms.
Growth capital
As mentioned, startups use venture debt to finance their growth and the measures associated with it.
Startups thus create a better position for the next equity round. For lenders, the allocation of growth capital is associated with significantly higher risks.
Equipment financing
If you want to grow, sometimes it is necessary to purchase specific goods. It can be new computers, office equipment, or servers. But it can also be machinery or raw materials for production.
In this case, startups can use venture debt, which works as working capital. For lenders, this means less risk. If the startup cannot meet its payments, the venture debt firm can sell the goods or equipment. It thus serves as collateral for the lender.
Factoring
Startups can also use venture debt in the form of factoring or accounts receivable financing.
Factoring involves the startup selling its outstanding receivables from customer invoices to the venture debt lender.
In return, it receives part of the invoice amount directly as capital from the lender. The lender charges a fee and then collects the invoice amount from the customer.
The startup is immediately liquid and does not have to wait several weeks or months for money.
It is particularly advantageous in the case of long payment terms. At the same time, the lender takes over receivables management, including dunning and collection procedures. Startups also save time and resources.
Bridge loans
Bridge loans are short-term loans intended to bridge the gap between funding rounds or significant business milestones.
They provide temporary financing to cover operational expenses, payroll, and other urgent needs until the next equity round is secured. Bridge loans are often used by companies anticipating a near-term liquidity event.
Venture debt financing: which financing instrument is the right one?
The first option is a bank loan.
However, most startups are hardly eligible for a loan. They usually cannot provide any securities or assets that would be of interest to a traditional financial institution.
After all, the business model of a tech startup is not something banks deal with daily – there is a lack of relevant experience and knowledge about it. Traditional banks work with predictable cash flows, cash balances, and profitable companies.
The second option is equity, meaning venture capital.
Business angels, later venture capital funds, and family offices are available at the initial stage. Startups, however, do not want to finance themselves in new equity rounds. There are three main reasons for this:
- Every equity funding involves a dilution of shares.
- Dilution reduces control, because VC investors actively influence the company, are part of the board, and give advice.
- VC rounds are time-consuming for founders and tie-up resources.
Venture debt follows venture capital, but does not replace it
If traditional avenues such as banks and venture capital firms fall through the cracks, venture debt can be an alternative form of financing for startups. By providing debt, startups can scale their business model and finance growth.
The startup does not have to give up too many shares too early (with warrants being an exception). It allows the company to reach further milestones and creates the basis for the next VC funding.
Typical growth measures that a startup finances with venture debt are:
- Purchase of operational equipment such as hardware or machinery
- Capital for acquisitions (M&A)
- Increasing revenue (e. g. marketing campaigns)
- Hiring of new employees
- Preliminary costs of a planned initial public offering (IPO)
Usually, venture debt accompanies existing equity financing. It follows venture capital, but it does not replace it. Venture debt and venture capital go hand in hand.
Thus, a good time for venture debt financing is directly following or during an equity round. Why?
- The startup has strong liquidity and is well-funded for the coming months or years. The costs of venture debt can be repaid with the help of equity.
- Venture debt lenders follow the results of the most recent equity round: They use the startup's valuation in terms of goals, performance, and enterprise value to allocate venture debt.
Strategic Use Cases: When to Use Venture Debt
Venture debt is a primary source of capital. It is also a strategic accelerant and a risk mitigator.
The Provider Landscape: Who Lends Venture Debt?
Venture debt providers fall into two main categories, each with different motivations, term sheets, and risk profiles.
1. Private Sector Lenders
These are the most common providers and include specialized venture banks, non-bank specialty finance funds, and large investment banks.
- Venture Banks (e.g., Silicon Valley Bank - pre-2023, Pacific Western Bank, Comerica Bank): Often offer a full suite of commercial banking services alongside the debt. They focus on establishing a deep relationship with the goal of being the company's primary banker through growth and exit.
- Specialty Debt Funds (e.g., Hercules Capital, TriplePoint Capital, Kreos): These are pure-play debt providers. They typically offer larger, more aggressive deals and have a higher risk tolerance, often resulting in higher interest rates and more substantial warrant coverage. They are focused solely on the return profile of the loan and warrants.
2. Government and Public Sector Lenders
These institutions often have a mandate to support specific national or regional economic goals (e.g., innovation, job creation).
- Examples: The European Investment Bank (EIB) or the KfW (Kreditanstalt für Wiederaufbau) in Germany.
- Key Differentiators:
- Lower Cost: Generally offer lower interest rates than private lenders due to their subsidized mandate.
- Longer Horizon: Repayment terms can be longer (e.g., 5-7 years).
- Specific Criteria: They often have stricter, non-financial requirements, such as focusing on strategic technologies (AI, sustainability) or requiring co-financing with private funds.
- Slower Process: Due diligence can be significantly longer (up to nine months, as noted by the EIB).
Alternative Debt Models: RBF and ARR-Based Financing
In recent years, highly specialized debt models have emerged, particularly for Software-as-a-Service (SaaS) and recurring revenue models:
- Revenue-Based Financing (RBF): The company repays the loan as a fixed percentage of its monthly revenue. This is highly flexible, requires no collateral or warrants, and automatically scales with the business's performance.
- ARR-Based (Annual Recurring Revenue) Financing: Lenders advance capital based on a multiple of the company's ARR (e.g., 0.5x to 1x ARR). This is a fast and predictable option for high-ARR, low-burn SaaS companies that want to maintain maximum equity control.
Venture debt is a popular method of financing startups, especially in the US, China, and Israel. In 2022, around $45 billion was invested in young companies via venture debt in these three countries.
In Europe, the financing volume with venture debt amounted to around $28.1 billion in 2022. Among the most active investors in debt funding rounds are the European Investment Bank, Bpifrance, BNP Paribas, Deutsche Bank, and HSBC.
How startups can secure venture debt
There are various requirements and processes for startups when using venture debt, depending on the investor.
Venture debt with a government background
For venture debt from the public sector, there is usually a distinct set of requirements for startups.
The german Kreditanstalt für Wiederaufbau (KfW) has been supporting young and innovative technology companies looking to finance their future growth with its venture debt program since 2019.
Startups must meet the following criteria:
- Startup must have raised venture capital
- No banks, insurance companies, or comparable financial institutions have a stake of more than 25% in the company
- The investment is made exclusively in combination with private venture debt providers, whereby the goal is a risk distribution of 50:50.
The European Investment Bank also has several requirements:
- That have received at least one round of equity financing from venture capital
- Where the EIB provides a maximum of 50% of the planned investment
- Which are strategically crucial to the European Union, e. g. AI, Industry 4.0, or circular economy technologies.
Venture debt financing from private companies
Similar to government players, equity financing is essential to venture debt funds. Usually, a startup must have secured at least one VC financing beforehand.
Other criteria for securing venture debt:
- Sustainable business model that has proven to be robust in the market
- Stable revenues and corresponding growth
- Reliable customer base
- A market that offers sufficient growth potential
- A team that has experience in scaling a startup and taking it to the next stage of growth
Of course, the requirements of venture debt funds are less transparent than government providers. Nevertheless, their offer is for startups that have passed the seed phase and are on the way to Series A or further equity financing.
Typically, startups must submit a detailed description of their investment expenditures and financial planning.
Venture debt firms review the submitted documents in light of their financial viability and economic profitability. In addition to due diligence and personal interviews, social, environmental, and climate aspects also play a role in the decision.
The role of venture debt and venture capital
To better understand venture debt, it helps to have a look at venture capital.
In general, venture debt follows venture capital, and that has consequences. The motives of the respective providers of debt and equity are often contradictory.
Who pursues which interests?
Venture debt investors carry the risk that the startup will neither make it to the next financing round nor be able to repay the loan.
Therefore, they cannot afford a high default rate. Lenders hedge their risk with correspondingly high interest rates, subscription rights, or other collateral.
It is a different ball game with equity capital.
In the case of venture capital, failure rates are part of the business model. VCs compensate them with a portfolio that is as diverse as possible, where one successful investment can make up for several failed investments.
Venture debt: high interest, high risks?
Venture debtors do not carry the same risk as VCs. However, they also do not participate in the success of the startup.
If a startup can no longer service its loan with venture debt and, in the worst case, has to file for insolvency, this has consequences for all shareholders.
They rank after the venture debt lender. Accordingly, they are subordinated as investors in equity and receive money only after the claims of the venture debt lender have been serviced.
Focus on cost of capital
VCs will pay attention to their startups' cost of capital. If interest rates burden cash flow and restrict the scope for action regarding investments, the growth rate can be lower. It impacts a potential exit, and a VCs profit when selling the shares.
Venture debt and venture capital are closely related. For startups, it is therefore advisable not only to deal with the terms of venture debt financing in advance. They must also consider the impact of venture debt funding on existing investors.
List of venture debt providers
Venture debt has established itself as a popular alternative to equity-based financing. In addition to those already mentioned, these are among the most active venture debt firms for startups:
- Kreos
- Columbia Lake Partners
- Blackrock
- Claret Capital
- Atalaya Capital
- Bootstrap Europe
- Flashpoint
- Orbit Capital
- Viola Credit
- TriplePoint Capital
- Hercules Capital
- Pacific Western Bank
- Comerica Bank
- Western Technology Investment
- Horizon Technology Finance
- Wellington Financial
- BlueCrest Capital Finance
- NXT Capital
- First Midwest Bank
- Canadian Imperial Bank of Commerce
Key takeaways: Venture Debt
Take a closer look into venture debt
Debt financing has increased in recent years. Startups have recognized that debt capital optimizes their capital stack and cost of capital. Generally, they still rely on VC financing, especially in their early stages. However, alternative options play an increasingly important role in further planning.
Venture debt benefits from this development. It helps startups to master the capital-intensive growth phase and to scale their business model.
Venture debt complements equity-based financing in the financing mix of tech startups.
It enables them to finance their activities between two equity rounds – without unnecessarily diluting their shares. However, it is not the only form of financing to secure debt capital.
Be aware of the repayment burden
However, venture debt also means taking on debt. And unlike equity, startups must repay debt.
Therefore, they should avoid taking on too much debt at all costs. The consequences are carried not only by companies but also by the venture debt providers and equity shareholders.
Startups should carefully evaluate a decision for or against venture debt. They should ask themselves whether venture debt funding is the right financial instrument and if the lender understands how the startup's business model works.
Choose a venture debt provider that understands your business
After all, it must be clear to the lender what strategy the startup is pursuing, the possible risks of the market and business plan, and what KPIs define success.
Why? It is because rapid company growth can lead to turbulence. Venture capital providers should deal with this professionally and pragmatically.
Summary: Venture Debt
Venture debt is a sophisticated financial instrument that has solidified its place as a critical component of the modern startup capital stack. It allows founders to achieve capital efficiency, raising only the equity needed for strategic control and using debt for growth acceleration.
- Key Differentiator: Underwritten on the strength of existing VC funding and future potential, not current profitability.
- Strategic Benefit: It extends runway and allows the company to hit a higher valuation milestone before the next, dilutive equity round.
- Primary Cost: Higher interest rates (8-15%+) and the use of warrants (1-5% dilution) as an equity kicker for the lender.
- Critical Risk: Covenants and the risk of a technical default that forces immediate repayment.
Venture debt is not a replacement for venture capital, but a powerful lever that follows and amplifies it. Companies that utilize it strategically demonstrate financial sophistication and a disciplined approach to capital allocation.
Q&A: Venture Debt
What is a "clean" versus a "dirty" cap table, and how does venture debt affect it?
A "clean" cap table is simple, with few shareholders, minimal strategic debt, and well-defined rights. Venture debt, especially with warrants, adds complexity, potentially making the cap table "dirtier." This complexity can be a hurdle for future investors or acquirers, who prefer simple equity structures.
Does venture debt count as a financing round (Seed, Series A, etc.)?
No. Venture debt is not an equity round and does not generally trigger changes in ownership structure or valuation (other than the warrant component). It complements, but does not replace, the VC funding series.
What is the average size of a venture debt loan?
The size is heavily correlated to the most recent equity round. A general rule of thumb is that the loan size will be 10% to 35% of the last equity round's principal. For example, a company raising a $10 million Series A might seek a $1 to $3.5 million venture debt facility.
Why do some lenders require a "springing lien" on the company's IP?
Intellectual Property (IP) is the primary asset of most tech startups. A "springing lien" gives the lender a security interest in the IP, but the lien only "springs" into effect upon an event of default. This is a crucial security mechanism for the lender, as the IP is often the only valuable collateral left in a distressed situation.
Secure your next funding – without giving up equity
Get up to €5M in non-dilutive funding with re:cap. Calculate your funding terms and see how much growth capital you could get.
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