Why Companies Are Racing to Raise Debt

2022 saw a steady downward trend in equity valuations after a robust 2021. With broader valuations not expected to rebound until 2024, many growth-stage companies are looking for capital sources outside of traditional go-to sources.
As companies plan for 2023, it is important to understand their capital requirements for strategy 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 $4MM 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. Valuations are not expected to rebound for the majority of 2023 and with more options for non-dilutive capital than ever before, this is a great time to start exploring debt.