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What is Venture Debt?

Frank Mastronuzzi
3 min readJun 8, 2023

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Venture debt is a form of financing that has become increasingly popular in recent years as a way for startup companies to raise capital. Unlike traditional equity financing, venture debt is a type of debt financing that is specifically designed for startups and high-growth companies.

In simple terms, venture debt is a loan that is made to a startup company with the expectation that the loan will be repaid in full, with interest, over a specified period. Unlike traditional bank loans, however, venture debt is often structured in a way that allows the lender to participate in the upside potential of the startup, such as through the issuance of warrants or convertible debt.

There are several reasons why a startup might choose to raise capital through venture debt.

One of the primary benefits of venture debt is that it allows startups to preserve equity in their company. Because venture debt is structured as a loan rather than an equity investment, the startup does not have to give up a portion of its ownership stake in the company to raise capital.

Another benefit of venture debt is that it can be a useful tool for startups that are looking to extend their runway. In other words, venture debt can provide a startup with the financial resources they need to continue growing and developing without having to raise additional equity capital. This can be particularly important for startups that are not yet generating significant revenue, as it allows them to continue building their business without having to worry about running out of cash.

One of the key features of venture debt is that it is often structured with several covenants and restrictions that are designed to protect the lender. These covenants may include things like financial performance targets, restrictions on the use of proceeds, and limitations on the ability of the company to raise additional debt or equity capital. While these restrictions can be seen as a negative for startups, they can also be beneficial in that they provide a level of discipline and accountability that can help ensure the long-term success of the company.

There are several different types of venture debt, each with unique characteristics and benefits. Some of the most common types of venture debt include:

Traditional Venture Debt

This is the most common type of venture debt and is typically structured as a term loan with a fixed interest rate and maturity date. Traditional venture debt may also include warrants or other equity-like features that allow the lender to participate in the upside potential of the company.

Revenue-Based Financing

This type of venture debt is structured as a loan that is repaid based on a percentage of the company’s monthly revenue. Revenue-based financing can be particularly attractive for startups that have a predictable revenue stream, as it allows them to repay the loan in a way that is directly tied to their business performance.

Asset-Based Lending

This type of venture debt is secured by the assets of the company, such as inventory or accounts receivable. Asset-based lending can be useful for startups that have a significant amount of assets, but may not yet be generating significant revenue.

Bottom Line

Venture debt can be a useful tool for startups that are looking to raise capital without giving up equity in their company. While venture debt does come with some covenants and restrictions, these can be beneficial in that they provide a level of discipline and accountability that can help ensure the long-term success of the company. With a variety of different types of venture debt available, startups have the flexibility to choose the financing option that best fits their unique needs and business model.

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Frank Mastronuzzi

Founding Partner @punchfinancial, VP Business Development @GreenoughGroup, CFO, MBA, SF-Based, consummate optimist, proud zio, proud daddy of Luca, the Wheaten