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16 March 2023·4 min read

Michał Papuga

Investment Associate, Flashpoint Venture Capital

Unlocking Growth with Venture Debt: A Financing Option for Ambitious Startups

In the world of startups, there are typically two ways to finance a company: equity financing and debt financing. While equity financing is often the first choice for many entrepreneurs, particularly at the early stage, venture debt is quickly becoming a popular option for startups looking for a more flexible and cost-effective financing solution to extend their cash runway in addition to their equity, especially during the bear markets and in an environment of lower valuations.

Venture Debt in Europe and CEE

The concept of venture debt was first introduced to the markets in the late 1980s, and since then, it has become a popular option for many successful startups like Facebook, Airbnb, and Palantir. These companies recognized the benefits of borrowing money instead of selling equity, and they were able to use venture debt to fuel their growth and achieve their goals.

While venture debt has been widely adopted in the United States and has been used frequently by startups in Western Europe for about 10–15 years, it only recently started to gain proper traction in the Central Eastern European (CEE) region. Despite this, there are already plenty of innovative startups from the region that have used venture debt to scale their businesses, including companies such as Tier or DocPlanner.

The Advantages and Disadvantages of Venture Debt

One of the biggest advantages of venture debt is that it allows startups to conserve equity and maintain control over their business. By borrowing money instead of selling equity, startups can avoid diluting their ownership and sacrificing decision-making power. Moreover, assuming a scenario in which a startup continues to scale its business, venture debt is always less expensive than equity financing, since it does not require startups to give up a portion of their value.

Illustration: Cost of equity vs cost of debt along with the valuation growth

Taking venture debt can also allow a startup to increase its valuation in the next equity round by providing the company with an additional runway to grow and hit key value-creation milestones. If the startup can use the venture debt to generate revenue, increase profitability, or develop new products or services, it can demonstrate to investors that the company is on a solid growth trajectory. This can translate into a higher valuation in the next equity round, as investors may be willing to pay a premium for a company that has demonstrated its ability to execute and achieve its goals.

Illustration: Impact of Venture Debt financing on the Valuation of the company

However, there are also some “downsides” to venture debt when compared to equity. The most notable is that by taking debt financing, the startups will have to make regular monthly payments, which can impact their cash flow and put pressure on their finances. Additionally, venture debt may not be suitable for all startups, especially those with the high volatility of revenue or those that are not yet generating significant scale of the business or where they are still in the “product-market fit” stage.

Key Terms in a Venture Debt Term Sheet

When considering venture debt, it's important to understand the key terms and conditions in a venture debt term sheet. Some key terms to look for include the loan amount, interest rate, warrant parameters, repayment terms, security, commercial covenants and default provisions. By understanding these terms, you can decide whether venture debt is the right financing option for your startup.

To that end, we will be covering the key terms and features of venture debt facilities in a series of articles that will expand on this topic and provide more detailed insights for startups considering this attractive financing option.

As more and more startups turn to venture debt as a flexible and cost-effective financing solution, it's clear that this form of financing is here to stay. While it may not be the right choice for every startup, those that can take advantage of venture debt stand to reap the rewards of growth and increased control over their business. So, whether you're just starting or looking for a way to take your business to the next level, it's worth learning about venture debt to understand when your startup is ready to consider venture debt as a financing option.

Related Posts:

TOP 10 CEE+ Startup & Investor Events In 2023 (by Roman Nováček, Partner, Presto Ventures)

Financial Crisis Made VCs Cautious And Picky: Here’s How To Pitch Them in 2023 (by Elena Mazhuha, Investment Director, Flyer One Ventures)

Everything Startup Should Know About ESG (by Agnieszka Hajos-Iwańska, Partner, B2RLaw)



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