How startups use venture debt

Afshan Qureshi
Afshan Qureshi
Content Marketing Manager
Posted on
May 25, 2022
min read
How startups use venture debt

Startup funding is one of the most challenging and worry-inducing aspects of starting a company. It’s no wonder that 60% of companies that raise a Pre-Series A venture round fail to make it to a Series A or beyond. The way that startups access and use venture debt is not an easy process, even for second or third-time founders. But, experience can help avoid common pitfalls and illuminate opportunities for how you can get ahead with your venture debt.

How to use your startup venture debt to get ahead

Expanding your founder reach and networks

At the core of venture debt fundraising, good partners can help demystify the investment process and facilitate the right connections. Venture debt investment can be a tricky game. It requires a delicate show of mutual interest with the ultimate goal of a long-term partnership.

From understanding signals to signing term sheets, tapping into Angel Investors and other founders can give startups a big leg up. Other founders can help cut through the noise with institutional investors via warm introductions, while experienced Angels Investors can help diffuse complex term sheets across venture capital and alternative financing. 

Bringing on an Angel Investor prior to institutional investors can help founders tremendously.  Given it’s rare to get a clear no from investors, the key for founders is to discern the signals that indicate true interest.

You know it’s a warm lead if they can’t stop contacting you, asking questions, and wanting to meet. This will not always be the case, but if you find yourself in the situation, then it’s worth investing your venture debt resources to obtain more venture debt resourcing.

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Improving your company’s finance strategy

You can use your startup venture debt to scale your finance department as you think ahead to what your business will need to survive long-term. This process involves finding tools that can work for you when you have 10 employees all the way to 100+ employees as you scale your business.

It can also mean that you’re afforded the opportunity to move quickly from working with outsourced options to hiring in-house at key times in your growth, especially as you refine your processes, and procure more tools to help standardize your processes across the board.

After all, if you want to grow in a fast but responsible manner, you need efficient policies, procedures, and reporting requirements from the get-go.

In the same way, it’s essential to have a pulse on the data, getting it in front of the right people as quickly as possible, and empowering all decision-makers through data in order to inform your business choices and your journey in obtaining startup venture debt. Additionally, you can use your venture debt to focus on the strategic side, which underpins all the decisions you make in finance, FP&A, and finops, because your strategy doesn’t just affect the finance department, but all areas of your business.

You need finance decisions to be aligned with overall company goals and you need to be sure you’re communicating those to the external markets. That means financial planning & analysis (FP&A) becomes a key area to work on and is a worthwhile aspect to invest your startup venture debt into.

Accessing more fundraising dollars

There are a couple of approaches for how startups can access and use venture debt. The first approach is led by business needs: where the company’s use of funds is the most critical component. The second approach is led by the market: where founders raise capital when the market conditions are best rather than when the company needs it.

The second approach allows for more flexibility. Investor conversations occur naturally based on business movement, and funding flows from those conversations. While this relaxed approach allows for more focus on the business, it may be less available to first-time founders who do not yet have a strong track record. In this case, bootstrapping can be necessary to get your business through the many challenges of growth. This approach could force you to focus on the business and make you a better entrepreneur.

Whether you adopt a business-led, market-led, or self-funded approach, maintaining focus on business objectives will strengthen your company and open doors to startup venture debt options in the future.

Seeking out alternative forms of financing to lower your cost of capital

Using a broader set of tools allows startups to pursue their goals with maximum precision while optimizing how they’re using their venture debt. Where equity is often used for growth, revenue-based financing or credit lines can also be used for working capital.

Using these alternative forms of financing can be more straightforward and cheaper than equity-based tools. For example, startups can leverage non-dilutive financing for projects or growth-led activities that generate immediate revenue, which is a very standard process, and the lowest cost of capital you can get. 

Combining tools like revenue-based financing and venture capital debt to reach across the breadth of your company’s objectives is becoming industry-standard practice, as startups augment venture rounds with 20-30% alternative financing.

Just this year, European startups have raised more than €8.3bn in non-dilutive capital, more than 5x than was raised in 2016. 

Many founders see venture debt-based fundraising as the be-all and end-all of venture financing, but this is another area where founders learn from experience. Diversifying capital structure with something other than equity is a great way to enhance it.

This approach protects the equity interests of both founders and their investors - 55% of VCs are either advocates of alternative financing or have invested in companies that are already using it. Ultimately, alternative financing allows for more exacting financial management, which helps founders retain control, raise more money, and grow their business faster.

Investing in your product to gain more customers

Product improvements are a tried-and-true way of bringing necessary changes and updates to your product with the purpose of getting new clients, retaining existing users, and recapturing lost customers and are a good way to use your venture debt. There are a couple of ways you can improve your products: 1) adding new features, and 2) upgrading existing ones. 

Upgrades & updates make a current product more advanced and tailored to your customer’s business needs and pain points. These kinds of solutions enhance your value proposition and expand your customer base.

Plus, it drives value for existing customers, diminishes churn rate, and contributes to building brand loyalty. Upgrading existing features and building new ones will involve innovation and risk-taking. However, the better you shape a product improvement plan, the better chances you have for success in your endeavors in the future.

Removing bottlenecks from your hiring

Early founders often spend more than 40% of their time on recruiting. While this may be necessary as you begin to build out your leadership team, it’s clearly not scalable. Using your venture debt to hire a recruiter- with a broad talent network- to build a consistent and repeatable recruitment process across your teams can prove fruitful long-term.

The best way to keep top candidates’ interested in your company in a competitive environment is constant communication. The recruiter will be responsible for maintaining that communication and being available for candidates to voice questions or concerns along the way. This frees up a ton of time for you as a founder to focus on what matters most- growing your business.

The base you set early on expands very quickly in the organization, and so the kind of people you bring on at the very beginning can define the culture for years to come. This is why it’s critical to avoid hiring bottlenecks, question inefficient recruitment processes, and constantly be on the path towards hiring the right talent, at the right time (without compromising your company and hiring standards).

Especially in these uncertain market times, it’s especially important to focus on retaining your current top talent while continuing to attract the best new candidates for the open roles in your SaaS organization. Using your venture debt to expand your headcount and make your recruiting processes more efficient pays off long-term.

Ultimately, your biggest goal with accessing venture debt is to grow your business, lower your costs overall, and improve your profit margins. Using your venture debt to get ahead in these areas should be your ultimate priority and planning strategically and using data will help you get closer to your goals.