Is your startup better suited for venture debt or venture capital?
Many founders look towards VCs for their next fundraising round. As glamorous as venture capital is, not every startup is a good fit for it. In fact, about 0.05% of startups successfully raise venture capital. While this may seem bleak, the options are not limited. Moreover, its lesser known cousin--venture debt--can help fill in those gaps.
So what is venture debt? As the name implies, it’s a type of financing that must be repaid without taking equity. Because of this, venture debt is relatively cheaper than venture capital. There are still some expectations involved to acquire venture debt. Typically, companies that are more mature with predictable revenue, have strong relationships with their customers, and don’t want to give up more equity take the venture debt route.
On the other hand, venture capital is often given to early-stage startups that don’t have an established brand or meaningful cashflow. With that, VCs are placing big bets on young companies to hit specific milestones for fast growth. It’s all risk capital that VCs are giving in exchange for typically 20% of an equity stake.
There is a much higher risk involved with venture capital as opposed to venture debt. Other popular reasons companies choose to raise venture debt are to accelerate growth to another level, acquire another company, buy out early investors to help control valuation, cash out, and to bridge before another fundraising round. Ultimately, those who can’t afford the risk may find venture debt to be a more suitable option.