Risk And Reward: Venture Debt And Equity Can Be Rocket Fuel For The Right Business

Written by allroads. Posted in Venture Equity

Venture equity is rocket fuel for some businesses
Like all gambles with large potential payoffs, venture debt and equity come with equally big risks. But when used correctly by experienced companies, venture debt and equity can act as rocket fuel that enables businesses to achieve many of their goals in much shorter timeframes.

Who Is A Candidate For Venture Debt Or Venture Equity?

Venture debt and equity are strategies designed to lubricate companies with capital before they take a dramatic leap forward. These are typically experienced companies in a good position with something big on the horizon. They have a proven business model, they have three to four years of tax returns, they have a diversified customer base, they are not dependant on the government and they have a fantastic management team.

These companies have examined their plan and realized that, if they could secure funding, they could explore a new market, launch a new product, hire new salespeople and/or double their growth. The potential is there, all the tools are in place, but they need funding in order to kick-start their strategy.

Basically, they’re in the financial position that investors love.

Venture Debt Vs. Venture Equity

With venture equity, the cash provided comes tethered to a loss of some degree of ownership. In many cases, it means that a business owner takes on a partner and forfeits some of the control to which they had become accustomed.

Venture debt is a five or ten-year loan that has a nine to eighteen-year runway built in. This runway allows the business to make payments only on the interest, not the principal. This enables them to get the full benefit of very little overhead as they work toward completing their objectives. When the term is up, they pay back the loan and the owner still owns the company.

The trade-off is that if he or she falls behind on payments, he or she will lose their business.

A Real-Life Example: The Facebook Hybrid

In the early days of Facebook, the soon-to-be master of social media was seeking a $30 million loan. They couldn’t get it, but they secured $10 million in venture debt and $20 million in venture equity — with an extended runway on the debt.

This satisfied everyone, and became a shining example of venture ingenuity in Silicon Valley. The investors loved it because their stock wasn’t diluted, and the business loved it because the longer runway bought them more time with cheap money.

A sudden influx of cash isn’t going to turn every company into the next Facebook. But for well-established, experienced businesses that have something real in the pipeline, venture debt and equity can provide a calculated risk that pays big dividends down the line.