Benefits of Venture Debt

Most business founders and management teams will eventually reach an impasse when relying solely upon equity capital for growth.  Establishing capital efficiency requires looking beyond equity alone in order to secure alternative sources of growth capital.  Venture debt can serve as this alternative source, allowing you to preserve more equity ownership and lower your overall cost of capital.

Seeking appropriate levels of debt capital offers companies at all stages of their lifecycle a useful, low-cost way to extend their financing horizons.  In the long run, trading off paying interest on loans often can be less expensive than financing your whole operation exclusively with equity funding.  Debt financing can also provide a competitive advantage over your peers as well as a critical insurance policy leading into your next round of financing.

This is not to say that venture debt should entirely supplant equity capital; debt is intended to complement equity.  By using combinations of appropriate amounts of equity and subordinated debt capital, entrepreneurs, management teams and venture capitalists can reach important development milestones and achieve a variety of other business objectives.

For Example:

 Equity Capital Only: A technology company seeks a financing round totaling $15 million, $5 million of which is to purchase equipment.  The company raises the entire $15 million in equity financing from a syndicate of venture capital and private equity sponsors.  As a result, the company must relinquish approximately 45% ownership—equaling a $33.33 million post-valuation.

 Debt and Equity Capital: The same company, with the same financing goals, raises only $10 million from venture capitalists and private equity sponsors and $5 million from Hercules Technology Growth Capital in the form of venture debt through an equipment loan.  Here, the company would surrender only 36%  ownership—equaling a $28.33 million post-valuation.

By seeking an alternative, complementary source of capital beyond traditional equity financing, the company has 9 percent less ownership dilution and achieves a lower overall cost of capital.  The savings can translate into tens of millions of dollars at an IPO or merger for management teams and investors alike.