top of page
  • Writer's pictureShivani Deshmukh

The Role, Future, and Evaluation of companies for Venture Debt Part 2

In the last blog, we understood the basics of venture debt. Venture debt is a form of financial support that some start-ups use to help them finance their growth. Venture debt is also known as seed money, bridge loans, and mezzanine financing. This type of debt, which was originally developed by banks in the late 70s, refers to debt that's raised to provide funding for an early-stage business.

One such question has become increasingly relevant: Is venture debt an effective way to finance startups? In this article, we will discuss why venture debt is even justified today in the first place and delve deeper into the questions related to it.

Table of Contents

What role would venture debt play during these times of market turmoil?

During these times of market turmoil, venture debt has become an attractive option for some entrepreneurs and small businesses. This is because venture debt comes with flexible interest rates and repayment schedules that make it easier for entrepreneurs to manage their cash flow needs.

Let’s take an example, a company ABC has 100 crores valuation. It needs 10 crores of funding with 10% dilution. When the company goes to the investors since the market is down, they weigh the valuation of the company to 50 crores with 20% dilution.

In this case, when the market is down and ultimately brings valuation down the company ABC can take 5 crores of funding with a 10% dilution. Then another 5 crores can be taken in the form of venture debt. Eventually, when the market conditions go up raising the valuation of the company to 100 crores, the 5 crores of venture debt can be repaid by taking 5 crores from the investors with a dilution of 5% (the interest can be paid from the profit of the operations).

This whole process of venture debt can save 5% of the stake in the company. After a few years when the company reaches a valuation of 500 crores, the 5% stake will be worth 25 crores. Thus, venture debt can give the advantage of short-term funding to save the dilution of the company when the market is down.

During these times of market turmoil, venture debt can provide working capital for companies that are facing high levels of cash needs due to their growth rates but may not have the ability to obtain more traditional forms of financing.

It bridges the gap between financing and innovation. Venture debt is a very powerful tool that can help companies move beyond the traditional funding model and toward an innovative one.

How has the year been so far and what do the days ahead look like?

Venture debt has been important throughout history. It was first used by investors who wanted to help build companies rather than sell their shares at any price. It was also used by first-time entrepreneurs who needed financing to start a business but did not have access to wealthy investors willing to put up money on the spot.

The traditional model for raising money from investors has been to pitch them your idea and then ask them for money — that's how you go from zero to $1 million in funding. Venture debt is different because it allows you to get money upfront and move quickly into production. It can be used as an alternative source of capital when investors are reluctant to invest or don't want to commit to long-term rounds.

Today, venture debt is used by more than just entrepreneurs; it is also used by technology companies seeking capital for acquisitions or new projects. Venture debt can be used as a form of equity or as an alternative to bank loans, depending on the terms negotiated between the parties involved in a transaction.

There's a lot of talk about the future of venture debt. Venture debt is a relatively new phenomenon in the venture capital world. It's been around for about 20 years, but only since 2000 has it become a mainstream part of the industry, with more than $40 billion in loans made every year.

The future of venture debt is bright.

The development of the market for venture debt has been slow, but it has been steady. The number of transactions has increased steadily over the past eight years and there is now more than $80 billion in outstanding venture debt. In general, this growth has been driven by two trends: (1) an increasing number of investors willing to invest in early-stage companies; and (2) an increasing willingness among those companies to take on debt to finance their operations.

In the next decade or so, we expect to see even more growth in the market for venture debt as investors continue to seek opportunities to put money into promising young companies at an early stage when they have less risk than later down the road when they have more risk and have spent significant amounts of time building their businesses. It also makes sense for investors because they can get a better return on their investment earlier than later in a company’s development cycle when it may not be as profitable as it will be later.

As you can see in the above picture venture capital could be at least 25x cheaper than venture capital.

How do venture debt funds evaluate companies?

The process of evaluating a company and its valuation is very similar to that of a venture capital fund, but with some important differences.

Venture debt funds are structured as private equity vehicles, although they may also have limited public equity investments. The primary goal of these funds is to maximize value for their investors, so they will look at all aspects of the company's operations, including financial statements and management reports.

The key question for these investors is "Will this company be able to pay off its debt?" If the answer is yes, then they can be comfortable investing in it. There are several different ways to evaluate companies. Investors in venture debt funds typically have specific criteria they expect companies to meet before investing.

  • The venture debt funds evaluate companies by looking at the business plan and how it's structured.

  • They also look at the team of people running the company, including their experience and background.

  • Some venture debt funds use a proprietary formula or algorithm to evaluate companies, some use a team of professionals, and some use a combination of both.

  • Private Equity firms typically have teams of analysts who evaluate companies for their portfolio companies. These teams include industry experts, who may have worked in the industry for years and have developed long-term relationships with key partners and suppliers. They will also have analysts specifically focused on technology industries, and they may also have an analyst focused on specific aspects of the technology sector (e.g., software).

  • Investors are looking for a product that has been proven with proof of concept, and a track record of success.

  • Investors look at the market size of the company and compare it to other competitors that are already established in the market space.

  • Investors also consider the company's revenue potential and compare it against similar companies in their sector.

If a company has been successful before, then it may be worth taking a chance on them again because they have proven themselves time and time again as successful business owners who know how to run their businesses successfully while making money along the way!

8 Key Steps to Prepare for Venture Debt

Securing funding takes preparation. Follow these 8 steps to ensure that your business is ready to answer the key questions that investors ask.

1. Collate your financials

  • Recent management accounts

  • Forecasts for the next 2-3 years

  • Last 3 years of accounts

  • A capitalization table

2. Compile a detailed company profile

  • Business History

  • Funding raised to date

  • Ownership

3. Explain your business model

  • Problems your business solves

  • Your unique selling points

  • Customer profile

  • Routes to market

4. Analyze your market

  • Size and maturity

(Whether it is emerging or consolidation or established)

  • Key trends

  • Competitors and what sets you apart.

  • M&A activity in your sector

5. Describe the management team

  • Key people in the business

  • Their role and background

  • The board of directors

6. Outline your funding needs

  • The amount required

  • Where and when this will be invested

  • What funds will enable you to achieve

7. Downside scenario planning

  • Cost efficiencies

  • Potential visibility on future revenue

  • Assets that can be sold

  • Details of what a third party would purchase in such a case

8. Indicate your ambition

  • Business goals

  • Exit routes most attractive to you


The ideal candidate for venture debt would be a business owner with high growth potential looking to expand their company, experiment with new technologies, open shop in new markets, or pay off high-interest rate loans. Venture debt is often offered by banks and even credit unions, although its cousin, SBA loans are also likely to offer both small and large loans. Venture debt offers quicker funding with competitive interest rates and flexible repayment options.

bottom of page