Venture debt has become increasingly popular as entrepreneurs look for additional sources of cash, but it’s not a direct replacement for venture capital. We break down how the funding approaches compare.
Venture capital is the dominant form of financing for startups, but venture debt — which offers a way for VC-backed startups to raise funding by borrowing money — can be appealing to founders wanting a quick influx of capital without giving up much equity.
Some of the differences between venture debt and venture capital include:
Qualifications: Venture debt financing is intended for fast-growing startups that have already received VC funding, whereas venture capital funding is available to companies whether or not they have received backing previously.
Equity: Venture debt doesn’t require giving away as much equity as venture capital, which means founders can retain more of their company while still raising money.
Repayment: Startups must pay back venture debt over time — unlike venture capital, which doesn’t have to be paid back directly. Instead, VCs take a significant stake in the company in exchange for capital.
Returns: Venture debt lenders make money through interest payments, fees, and warrants, which can convert into equity at a later time. VCs make money by selling equity during an exit opportunity, such as when a company goes public or is acquired. Average venture debt returns are lower than VC returns, but individual venture debt investments tend to be less risky as they’re quite likely to be paid back.