Matt Holtz | Senior Director of Corporate Development
Last week, Harness, a software delivery platform, announced a substantial $150M venture debt raise from Silicon Valley Bank and Hercules Capital. This is one of the largest venture debt rounds in recent times, strategically designed to bridge the company to its IPO while minimizing dilution to existing investors.
In light of recent developments, it’s evident that venture debt can play a crucial role in a company’s financial strategy. With early-stage fundraising still difficult, now may be the right time to consider diversifying your capital structure via venture debt. Here are some key benefits compared to traditional equity financing:
- Runway extension:
- Venture debt can function as an insurance policy by providing breathing room for the company to execute on its long-term strategies.
- With startup fundraising still slow, venture debt provides additional liquidity to grow into a company’s valuation goals and potentially avoid a down round. It also allows the company to negotiate from a position of strength with a strong balance sheet.
- Preserving Ownership with Reduced Dilution:
- Runway extension allows you to raise your next round 6-12 months later – at a much higher valuation and less dilution.
- Venture debt typically has minimal warrant coverage, limiting dilution to the ownership stakes of existing shareholders. Your next raise can be a mix of equity and venture debt, which means significantly less dilution overall.
- Lower Cost of Capital:
- Venture debt generally has a lower cost of capital compared to equity, as the overall cost of debt can be less expensive than giving up equity at early stages.
- Flexible Capital:
- Venture debt often comes with fewer covenants and restrictions compared to traditional bank loans, offering more operational flexibility to the borrower.
- The debt can often be structured as a term loan or revolver, with a revolver structure only requiring interest payments on the drawn portion of the facility.
Last year, the fall of Silicon Valley Bank caused significant uncertainty in the venture debt market. However, as often with the U.S. economy, the crisis led to a strengthening of the ecosystem with new solutions making the industry more stable, mature, and secure:
- Improved FDIC Protection:
- The Insured Cash Sweep was developed to provide a secure, convenient, and fully insured solution for managing large cash deposits. This goes well the standard $250K FDIC insurance limit, and can provide full FDIC insurance on balances exceeding $100M.
- Competition and Diversification:
- The diaspora of ex-Silicon Valley Bankers has seeded and fortified the venture lending practice for many other banks, including both bank and non-bank lenders. The flexibility and long-term approach of these lenders have created a more balanced ecosystem, reducing the risk of SVB being the “only game in town.”
However, it’s important to know that venture debt deals are significantly more complicated than a preferred equity round and can have long-term implications for a business. These implications may include restrictive covenants, increased interest expenses, and potential ownership dilution if the deals are not well-negotiated. Ensure you are protected by speaking to an advisor that is familiar with the space.
At Embarc, we are deeply engaged in the venture debt space, advising clients at various stages of maturity, from Series A to Pre-IPO. Our expertise encompasses knowledge of the leading lenders, key terms, and negotiation strategies to secure the best outcomes for our clients. If you’re interested in exploring venture debt for your business, we would be happy to discuss how we can assist you.
Contact Embarc Advisors today to learn more about how Venture Debt can aid your business.
