What Do Venture Capitalists Think About Venture Debt?

Q: What is your view on venture debt?

A: (Jason)  I like Venture Debt under the right scenarios. Companies can fund themselves through debt much more cheaply than equity in most situations and debt can help smooth receivables lumpiness, provide equipment financing and a host of other useful things. I think Venture Debt sometimes gets a bad rap, because it’s easy to find stories out there of companies who had their venture debt called at the most inopportune moment.

“Venture Debt” is not bad. It’s the debt holder that can be. My suggestion is to only deal with venture debt providers who are regular, long-term players in the market who themselves, exhibit good financial strength. There are plenty of banks who have dabbled in our market. They’ve made huge pushes to acquire a start up portfolio and then have decided this is not a strategic market for them. They’ve then started calling loans and exhibited other weird behavior.

We’ve seen other debt providers who don’t enjoy financial strength themselves and their financial backers get flakey and thus they become even more difficult to deal with.

Bottom line, all debt is not equal. Make sure that your provider has been around the block and intends to stay in this market long term. With this, you’ll generally get fair play in the debt arena, as each of you intends to be around the venture ecosystem for a while and has no incentive to act poorly.