Capital idea: the rise of venture debt

An article written by Financier Worldwide. Read the full article here.

Amid the ongoing economic uncertainty emanating from the coronavirus (COVID-19) pandemic, an increasing number of capital-hungry companies are turning to venture debt as a relatively speedy way of accessing new funding.

Venture debt, as defined by the Corporate Finance Institute (CFI), is a type of debt financing obtained by both early and late-stage companies. It is typically used as a complementary method to venture equity financing and can be provided by both banks specialising in venture lending and non-bank lenders.

“Companies are operating in a very uncertain environment and businesses with solid fundamentals want to have an extra layer of a cash buffer to be able to steamroll ahead of their competition,” says Dr Jeremy Loh, co-founder and managing partner at Genesis Ventures. “Raising equity in this environment could mean a lower valuation that could hurt their next financing round ambition. An added advantage of venture debt comes in the form of bringing lenders that are sophisticated about innovative and disruptive new economy businesses into the capital stack and capitalisation table.”

Within the world of aspiring unicorns, entrepreneurs are optimistic about the use of venture debt, with many expecting the impact of COVID-19 on venture markets to lead to a permanent increase in the use of venture debt.

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