Venture debt or venture lending (related: "venture leasing") is a type of debt financing provided to venture-backed companies by specialized banks or non-bank lenders to fund working capital or capital expenses, such as purchasing equipment. Venture debt can complement venture capital and provide value to fast growing companies and their investors. Unlike traditional bank lending, venture debt is available to startups and growth companies that do not have positive cash flows or significant assets to use as collateral. Venture debt providers combine their loans with warrants, or rights to purchase equity, to compensate for the higher risk of default.
Venture debt can be a source of capital for entrepreneurial companies. As a complement to equity financing, venture debt provides growth capital to extend the cash runway of a startup company to achieve the next milestone while minimizing equity dilution for both employees and investors.
Venture debt is typically structured as one of three types:
Venture lenders frequently piggyback on the due diligence done by the venture capital firm.
Venture debt providers are typically classified into two categories:
1. Commercial banks with venture-lending arms.
These banks typically accept deposits from the startup companies, and offer venture debt to complement their overall service offerings. Venture debt is usually not bread and butter for these providers. Debt lines from the banks start as low as $100,000 and for appropriately backed and/or companies with scale, can reach into the tens of millions in terms of facility sizes. Some players in this category are: