Do VC funds use debt?
If you are going to raise institutional venture capital to build and grow your business, it's worthwhile to consider using venture debt to complement the equity you raise.
Venture debt is financing that usually takes the form of a loan, but not always. Also known as venture lending, venture debt is commonly used by VC-backed early and growth-stage startups to: Inject capital to help business growth. Extend their cash runway in between funding rounds without diluting the business.
Because they fund early-stage and sometimes pre-revenue startups, venture capital loans are considered a risky kind of debt. That means that interest rates are usually higher than traditional debt financing, and terms are usually shorter. Senior debt.
VC firms control a pool of various investors' money, unlike angel investors, who use their own money.
The capital in VC comes from affluent individuals, pension funds, endowments, insurance companies, and other entities that are willing to take higher risks for potentially higher rewards.
Venture debt financing requires repayment, just like any loan comes with contractual repayment terms. Venture capital is not paid back like a loan — instead, venture capital firms receive their payment in the form of equity, which can be recouped when the company is sold or eventually goes public.
The glory days of venture capital are winding down, leaving in their wake a host of overstuffed tech firms and a bear market ready to maul.
The key difference between venture capital and venture debt is that venture capital is an equity investment made by a VC firm into a startup, whereas venture debt is a loan taken up by the startup to be repaid with interest during the loan tenure.
No repayment required: Unlike loans, venture capital investments do not require repayment. Instead, investors receive a share of the company's equity, which can provide significant financial gains if the company is successful.
Venture debt is a loan to an early stage company that provides liquidity to a business for the period between equity funding rounds. Venture debt is rarely used as a long-term financing solution. Typically, these loans are repaid within a period of 18 months or sometimes up to two-three years.
What is the dark side of venture capital?
VCs, driven by the need to show returns to their own investors, may push startups to focus on short-term gains, potentially sacrificing the long-term health of the business. This can lead to a lack of innovation, reduced investment in research and development, and missed opportunities for sustainable growth.
If the venture capitalists are unable to recoup their investment, they will be forced to write off their losses as bad debt. This will hurt their returns and could even put them out of business. In addition to the financial losses, venture capitalists may also suffer from reputational damage if a startup fails.
VCs finance very few home runs. Even the top VCs fail on about 80% - 90% if their ventures, according to one of the most successful VCs in the U.S. The top 2% earn high returns because they finance home runs.
The sharks are venture capitalists, meaning they are "self-made" millionaires and billionaires seeking lucrative business investment opportunities. While they are paid cast members of the show, they do rely on their own wealth in order to invest in the entrepreneurs' products and services.
Junior Partners are likely to earn around the $500K level (or less), with General Partners in the $500K – $1 million range in terms of salary + year-end bonus.
Georges Doriot, French immigrant, WWII hero, Dean of the Harvard Business School and innovator, is known as “the father of venture capital.” While his firm was based out of Boston, many of his first investments, the investments that made modern venture capitalism a possibility and later a reality, were start-up ...
Minimal Equity Dilution: Venture debt allows companies to raise growth capital without giving up large portions of equity. Potential dilution may come in the form of warrants. Maintain Control: Since venture debt does not involve large equity stakes, founders can maintain control of business operations.
Venture debt is often raised alongside or soon after an equity round. Although some lenders, like Flow Capital, provide venture debt to non-venture-backed companies, creditworthiness and bargaining power are generally highest immediately after closing a round of equity.
Typical market rates for venture debt
Closing fees - typically 1% of the principal amount. Origination fees - typically 1% of the principal amount. Warrants - banks typically require the lowest warrant coverage at 1-2%, while other funds will require 2-5%+.
Typically a VC fund's lifetime is 10 years, split into: Initial investment period (2-3 years) – this is when the fund is actively looking for and making new investments. Portfolio development period (3-5 years) – this is when the fund is focused on portfolio development and follow-on investments.
What percentage of VC funded startups fail?
25-30% of VC-backed startups still fail
Experts from The National Venture Capital Association estimate that 25% to 30% of startups backed by VC funding go on to fail.
if a startup fails, the VC basically loses all the money that was invested. There is no clawing back of money that has already been spent. The VC purchased equity in a startup and received that equity in exchange for the money.
Here is why few VCs earn most of VC profits: Home runs are key to VC returns because VCs fail on about 80% of their investments. Only about 19 are successes and one is a home run, and these profitable ventures have to pay for the failures and offer a return.
Venture Capital is probably one of the few industries in the world — if not the only one — that, on average, loses money. A TechCrunch article from 2017 reported that 50% of venture capital funds make less than a penny on what they invested.
You give up some control of your company
Venture capitalists essentially buy equity in your brand, which means they now have a say in how you operate. While ideally those investors have deep experience and contacts in your industry, they also come with their own opinions about how you do things.
