What is Venture Debt?
Venture debt is a loan made to venture-backed startups, typically right after an equity round. Unlike traditional bank loans, venture debt doesn't require profitability or hard assets as collateral. The lender underwrites based on the startup's VC backing, growth trajectory, and ability to raise future equity.
It's not a replacement for equity. It's a complement. Most startups use venture debt to add 3-6 months of runway on top of their last equity raise.
Why Startups Use Venture Debt
Extending runway without dilution. If you raised $10M at a $40M valuation, adding $3M in venture debt gives you 30% more runway without giving up additional equity. That extra runway can mean hitting milestones that increase your next-round valuation.
Key Venture Debt Terms
- Loan amount: Typically 25-50% of last equity round
- Interest rate: 8-15% annually
- Term: 24-48 months with interest-only period upfront
- Warrant coverage: Lender gets warrants for 0.1-0.5% of company equity
- Covenants: Minimum cash balance, revenue milestones, or other financial requirements
Venture Debt Risks
Debt has to be repaid regardless of company performance. If the next equity round doesn't happen, you've added obligations without a clear path to repay. Covenants can restrict your operating flexibility. Defaulting on venture debt can trigger serious consequences including acceleration of the full loan amount.
Example
Series A startup raises $8M equity at $30M pre-money:
- Venture debt: $3M (37.5% of equity round)
- Interest rate: 10%
- Term: 36 months (12 months interest-only)
- Warrant coverage: 0.25% of fully diluted shares
- Monthly interest-only payment: $25K
Without debt: 18 months runway at $450K monthly burn.
With debt: 24 months runway. Those extra 6 months let the company hit $2M ARR instead of $1.2M ARR before raising Series B.
Series B at $2M ARR: $60M valuation. At $1.2M ARR: maybe $35M. The $3M debt (plus ~$200K interest and 0.25% warrants) potentially saved the founders 10+ points of dilution.