Why Now is the Right Time to Raise Debt

Why Now is the Right Time to Raise Debt
In 2021 we saw debt deployed to the venture space at a record pace and volume. Growth stage companies are finding more sources of capital outside of traditional equity financing. Though the vast majority of our clients are backed by VC or PE groups, once they began to hit their scale, they realized and seized on an opportunity to add cash to the balance sheet through capital that will not add more shareholders to the cap table. Recently, this has become even more attractive as many companies are currently experiencing down rounds.

As companies enter the 2nd half of their 2022 growth plans, it is important to understand the capital requirements needed for execution and where said capital will come from. If the answer is new equity, perhaps it is time to look at the market and see if venture debt is a fit for your company’s current and future stage and needs. 

Regarding the Flexible Nature of Venture Debt

Of late, we’ve been having more conversations with CEOs and CFOs indicating a need for more flexible capital beyond what they currently have on their balance sheet.  The discussions are an interesting blend of the necessity to be prepared for continued uncertainty and the desire to be positioned to capitalize on unexpected opportunities. While current cash-on-hand may be sufficient to achieve projections and objectives, a deficiency may exist to execute on unforeseen growth or defensive needs. Many of our clients find venture debt to be a “goldilocks” solution - just right.

When you raise an equity round, it is more common to raise capital to fund the next 2-3 years, all at once. Debt is different, it  is more commonly raised incrementally, so as to not overburden the balance sheet with unnecessary leverage. 

When equity raises have diluted you already

Venture debt is meant for companies that have typically already gone through the equity raise cycle once or twice, and are looking to preserve the cap table while still maintaining a capital need. Debt providers, even with warrants, are not shareholders in the company the same as VCs; they do not look for board seats or influence in management. Founders and management looking for capital that will preserve the stakes of the current shareholders, and allow them to continue to run their company without interruption are best suited for this type of financing.

Companies securing debt

If you are a SaaS company, once you approach the $2MM ARR Run Rate mark, very suitable venture debt options start to open up to you. For non-SaaS companies, whether product or service-oriented, we advise scaling revenue closer to the $5MM annualized revenue range before exploring debt options that are truly scalable for your business.

Our job is to evaluate our clients’ needs and optionality in the market, bring the assessment to them, and then guide them through the process of navigating the debt markets and structuring terms. 2022 is shaping up to be another banner year for fundraising, and with more companies pursuing debt capital, this is the time to start evaluating those options.