Venture capital can propel your company to hyper-growth. However, if you've already given away a significant amount of equity, you may not be able to afford further diluting your ownership.
The good news is that venture capital loans provide business owners with opportunities to work with investors without necessarily giving away more equity.
Between bootstrapping your business, applying for a working capital loan, going to a bank, or securing venture capital loans, the latter option has a certain appeal. While applying for funding can be time-consuming, venture debt has an array of advantages and uses. Some of these benefits include:
In other words, venture capital loans are about more than just money. Rather than borrowing from a lender, you get a business partner who has a vested interest in your business.
There can be risks associated with venture capital loans, especially considering that there’s no guarantee your business will succeed. You may face several challenges, particularly if your startup is not in a rapid growth stage.
Taking on venture debt rather than giving equity means that the venture loan is considered "senior debt". Therefore, the capital loan is first in line for payment. While it may not involve personal collateral, venture capital lenders can seize business assets or liquidate the company if repayments are not made.
With these risks in mind, venture capital loans should be considered when your company is looking to:
The best way to conceptualize venture capital debt is to look at it as another form of working capital financing. While it’s less restrictive than a traditional bank loan regarding eligibility and requirements, individual lenders will have their individual needs.
At the same time, it's essential to look at how venture capital loans differ from traditional small business loans:
The process of obtaining a venture capital loan can be time-consuming. However, this comprehensive process is vital if it's the right loan for your business.
Firstly, research different venture capital firms. Every investor tends to focus on a specific area or sub-niche. For example, firm A might specialize in funding healthcare SaaS products, while firm B has a portfolio made up of fintech products.
Next, connect with prospective investors. The best way to do this is through a warm introduction, such as having a mutual friend or colleague introduce you both.
Once you have the opportunity to pitch your business or idea, you'll need to have an elevator pitch ready as well as a strong pitch deck. Aim to sell your vision, talking about your achievements to date, and why you are looking for a venture capital loan.
If your pitch is successful, you will need to set time aside for meetings and be prepared to get into more detail. Potential investors may want to discuss their proposed term sheet, perform due diligence, and finalize the investment. This entire process can take several weeks, if not longer. Learn more about the process here.
When applying for any loan, lenders will want more than a balance sheet. Keeping your financial operations transparent and accurate is a crucial way to ensure you always have access to capital for operating needs or unexpected expenses.
After securing a venture capital loan, you can use your working capital for operational and business expenses as long as you adhere to the term obligations.
Having venture capital backing can jumpstart your business growth, providing you with a business ally and partner. Having a seasoned investor in your court can bring peace of mind as you focus on driving revenue and developing your product.