There was a well-written article in Wall Street Journal today about venture debt and its virtues. You can read the article summary here. You need subscription to read the complete article. Besides the fact that the article started with Retrevo, Pui-Wing did a good job of presenting different viewpoints about the venture debt from entrepreneurs, venture capital investors and venture lenders. Pui-Wing quoted VentureOne estimating $2 billion loaned to US venture-backed companies last year up from $434 million in 2002 (some of us might remember the bust). This is an incredible amount of debt financing secured by venture-backed companies. But before every entrepreneur and startup CEO starts flipping through yellow pages and call venture lenders (and there are plenty around), let meoffer a few words of advise:
- If you think venture debt is easy money, it probably is. If you think it is cheap money, think again. Yes, it seems attractive that you pay an interest rate in high-single digit to low double-digit with nominal warrant coverage, remember that there is a time bomb ticking (as opposed to venture financing that doesn't have a defined maturity). You not only pay the principal but a decent chunk in interest. Before you go crazy about venture debt, make sure you understand what you need this money for. Understand what significant milestones will you achieve with this debt added to your financing such as revenue acceleration (that justifies the cost of capital), closing some significantdistribution deals etc. that will help you raise venture money later with significantly up valuation. Just adding a couple of months to the runway without clear objectives is a recipe for trouble later.
- Rest assured if the capital is available, you will want to spend it. It requires extreme restraint and fiscal control to spend the money according to your actual plan (and not over-spend because it's easily available). If profitable revenuedoesn't come in as expected and if the market conditions change, you will be left witha drag on your P&L that will whack you in the worst possible time. Add to this the control that the lender might have in calling a default and you will need some serious help.
- If you do decide to pursue the venture debt route, negotiate, negotiate, negotiate. This is a good time to raise venture debt. If you don't understand the nuts and bolts of this, get some professional help. Pay attention to interest rates, warrant coverage, collateral, default triggers, payment terms etc.
Good luck! BTW, if all you are looking for islaptops for your employees, check out retrevo laptop deals. Dell has a 12-month no-interest promotion running on XPS series laptops and desktops. This might be a better option that venture debt :-).