If you’re considering starting a new business, you’re likely familiar with venture capital (VC) and firms that provide this capital to entrepreneurs. You may not, however, be as familiar with the term “venture debt.”
Both of these methods for getting needed capital can be potential options for start-ups when entrepreneurs can’t the funding they need from traditional lenders. In a highly risk-averse financial climate, traditional lenders often don’t want to take a risk on new business owners who may have little or no track record even if they have what seems like a solid idea for a business.
Venture capital
Typically, VC firms provide financing in exchange for getting a share of a business’s future profits. To help ensure profitability, VC firms generally require a say in business decisions and often a seat on the board of directors.
It can actually be a great benefit to entrepreneurs to have people with experience in their particular industry advising them – particularly in the early days of their business. The partnership can also be extremely lucrative to the venture capitalists if the company goes public.
Venture debt
Venture debt is typically provided by lenders that specialize in providing loans to new and (more commonly) expanding companies. It’s a risky business. Silicon Valley Bank learned that last year when it collapsed and had to be saved by another bank. This is why venture debt is a more common option for established businesses that want to expand or maybe even go in a new direction than for start-ups.
Unlike a VC investment, venture debt involves a loan that has to be repaid directly, with interest. The lender may still have some equity in business (although less than a VC firm would) and less involvement in decisions. However, the lender may have professionals who can provide valuable advice – particularly if they focus on a particular industry.
However you plan to finance your new company or your expansion of your current company, it’s crucial to understand the pros and cons of all of the options open to you and how your financing will affect your business operations. This is just one reason to seek experienced legal guidance as proactively as possible.