Navigating a Venture Debt Portfolio

October 25, 2022

by a searcher from Dartmouth College in Los Angeles, CA, USA

I work with a firm that does coding, cybersecurity, and various tech-heavy professional services for pre-seed companies and, to keep the cap tables clean, they issue venture debt for services rendered, leaving the start-ups to use their cash on advertising, strategy, and such. Very often the firm has board seats so they can right the ship if the direction gets too far off course and jump in with some strategic advisory, introduce clients, and overall give it the old college try before things might capsize.

This venture debt is in place with a double-digit number of firms that are humming along from firms with good runway, and reliable payment history, albeit most of the book is less than a year or two old. Would you take bank financing to this and treat this as a consulting business or how would you attack the financing on this?

Reply by an intermediary
from University of Toronto in Toronto, ON, Canada

Hi Robert, because of the type of debt (venture debt), and early stage, it's unlikely this could fit for a bank lender. Reliability of revenue and history being key for a bank. However, alternative lenders provide lending book financing to other lenders so the exercise could be to establish the alt lenders that will finance venture debt, the credit quality of these borrowers, and what pricing and advance rates are possible. But usually that's for a stand alone lending business so it would need to be determined if they'd finance a professional service firm doing lending. That's definitely quite niche. If you have financial information I can have a further look to get a better sense of the overall picture. You can reach me at: redacted

Reply by a searcher
from Dartmouth College in Los Angeles, CA, USA

Thank you for your thoughtful thoughts on this, Tim. Will absolutely follow-up.

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