What’s the big advantage of this kind of financing? It’s non-dilutive: For business founders, venture debt provides growth capital with minimal equity dilution. “The venture lender wants to follow in the shoes of investors they know and trust, rather than risk lending to a company without venture backing,” it adds.
Companies without VC investors face significant difficulties in attracting any venture debt, says SVB. It’s debt that supports the equity and serves as a bridge for high-growth, venture funded companies - to their next funding round, IPO or sale, he adds. It complements it: “Venture debt really piggybacks on venture capital,” says Alex Baluta, CEO of alternative asset investor Flow Capital. It’s important to understand that venture debt doesn’t replace VC investment. It’s not generally available to seed-stage companies, but is “designed for companies that prioritize growth over profitability,” a Silicon Valley Bank explainer notes. It’s designed specifically for early-stage, high-growth companies that may not yet be in the black, but are performing well and generating strong revenues. So what is venture debt, exactly? It’s a kind of loan offered by banks and nonbank lenders that typically combines the traditional features of a loan with some aspects of VC financing. But venture debt - or, as Bloomberg puts it, VC’s lesser-known “baby cousin” - is also seeing soaring growth.
And it’s booming, with global VC investment exceeding USD 675 bn in 2021. VC is actually a subset of private equity, although the two types of investment differ substantially. Venture capital - where investors provide funding to small businesses with long-term growth potential, in exchange for equity - has become a core component of startup financing.
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