Venture debt is not for every startup or for all fundraises.
It is best used in conjunction with an equity raise.
The equity funding provides ongoing working capital that doesn’t need to be paid back.
It works well between equity raises from institutional investors.
The business must be up and running with stable revenue.
Those with recurring revenue are a good fit.
Those with healthy gross margins also do well.
Investors will look at the cash flow of the business, so it’s important to have a healthy cash flow statement.
It doesn’t work well for seed startups that are still looking for product-market fit.
Established businesses will find it easier to raise venture debt as the investor will look at the company’s traction, track record, business model, and previous fundraises.
Venture debt raises are typically limited to 25% of the equity raises, so a $3M fundraise most likely will not exceed $750K of venture debt.
Most loans last around four years, so it’s not often used for working capital but rather for specific projects.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.