Is Venture Debt a Workable Alternative to Traditional Fundraising?
When it comes to fundraising, businesses should always be on the lookout for new ways to get ahead. This includes knowing when to push the button on fundraising, how to seek interest from the right pool of investors, and what kind of funding to seek - including venture debt.
At our CFO Connect community event in Paris on Thursday 23 January, we sought advice from three individuals with a depth of experience when it comes to venture debt:
Romain Bichet, Chief Financial Officer at Aircall: Romain has been the CFO of Aircall for over three years, and brings a depth of experience as a strategy consultant. He played a leading role in raising €29M in debt in 2019.
Ross Ahlgren, General Partner at Kreos Capital: Ross is a co-founder of Kreos Capital, a leading provider of debt facilities for high-growth, equity-backed companies. Kreos has invested more than €2.4B in over 540 companies in a range of sectors, including Aircall.
Jack Diamond, Vice President at Kreos Capital: With a background in law and financial innovation, Jack has a lot of experience in the world of startup equity. As Vice President at Kreos Capital, Jack has helped many growing startups access venture debt.
Now, here are the six key takeaways from our discussion on venture debt.
Takeaway #1: The venture debt basics
Venture debt is a type of debt financing sought by early-stage companies, and is typically used alongside traditional equity venture financing. It’s a way for businesses to access capital without giving up more equity.
As Ross explains, venture debt is about providing support to early stage startup and growth companies, and focusing on factors beyond simple profitability.
“With venture debt, companies don’t have to be profitable yet. Most of the companies we fund at Kreos have traded profit for growth. The normal sources of debt funding traditionally look at things from a profitability model, but we adopt more of a venture capital view and examine the underlying business model.”
Jack agrees. “As a company, our DNA is a lot more akin to the venture capital model. This breeds behaviour that is a bit more pragmatic and practical. We do offer debt, but we don’t want to be lumped in with banks.”
Takeaway #2: Venture debt gives startups greater flexibility
As Jack explains, venture debt gives growing startups more freedom to try new things.
“If a startup was dealing with a bank, and there was slippage in the business plan, this would probably be kicked to the restructuring team. With Kreos, we want to make sure the company does well, whereas a bank would be focused more on getting cents in the dollar.”
“Our mentality is different,” says Ross. “At a bank, people chop and change. We’re a fund, and we work in much longer timeframes. We’re more in tune with the way businesses grow.”
Romain’s experience backs this up. “At Aircall, we raised a Series B in April 2018, but we implemented the debt facility with Kreos in 2019, a year later. We wanted the freedom to decide when to raise a Series C depending on the growth of the business. Having access to venture debt made all the difference for us.”
Takeaway #3: Venture debt doesn’t dilute equity
As Ross explains, the major advantage of venture debt is that it leaves equity intact.
“Debt is non-dilutive compared to equity,” he says. “At the beginning, company valuation is lower, and you have to give away more equity. If you can extend the period of time before your next valuation - even for an extra six months - this can help lower equity dilution.”
“That’s why venture debt is such a good complement to equity.”
Takeaway #4: Companies use venture debt to grow faster
Venture debt can be a great way to complement existing equity, and to give companies the ability to reach higher growth targets.
“A good example is working capital and expansion capital,” says Ross. “Let’s say a company raises around $10M in equity, but realises that with $15M, its growth curve could be even higher. That’s a great use of venture debt - you’re complementing the equity to give yourself a longer runway.”
This way, venture debt offers companies greater flexibility to reach their goals.
Takeaway #5: Lenders can match venture debt with demand
Venture debt is also a useful way for lenders like Kreos to match debt with demand.
“We’re not a bank,” says Ross. “So we’re not prescriptive when it comes to equity percentages. In the early days of FinTech, we were funding a lot of companies in the UK. The collateral ratios were totally different, and we could lend more earlier than with loan book models.”
“It’s not like private equity. We don’t make our money on financial engineering, for example with covenants and loan-to-own. The only way we make money as a fund is if a business succeeds.”
Takeaway #6: Startups need to know more about venture debt
In Romain’s opinion, startups need to know more about venture debt.
“At Aircall, our venture debt closed one year ago, and I had a lot of questions about it. It’s not a well-known tool in France, but it is very useful for companies to grow.”
Ross agrees. “At Kreos, we’ve funded over two dozen French companies, mostly in bio and healthtech. There is always room for us to do more, and to spread the word about how useful venture debt can be.” Conclusion: Consider whether venture debt is the right choice
Thanks to Romain, Ross, and Jack, we had an excellent discussion on the ins and outs of venture debt, and helped attendees build their understanding of this important growth tool.
The CFO Connect community is a great place to build your finance network and explore new parts of the startup world. If you’ve found this recap useful, then be sure to join us in person for our next event!
Many thanks to Romain, Ross, and Jack for taking the time to meet with us and share their insights and experience on this fascinating topic!