Month: May 2014

A couple of weeks ago, I published a post which posited that Venture Debt at the early stages is overused in today’s market and listed out some key considerations that companies must understand prior to taking on leverage. One consideration that I’ve opined on repeatedly is the concept of lender reputation and the necessity of choosing a Venture Debt provider that is aligned with you on all fronts, from personality to business philosophy. Western Technology Investment (WTI) without question, is one of the benchmark Venture Debt investment firms in the world, and has provided over $3B in debt financing across a 30+ year history to companies at all stages of development. Companies such as Facebook, Google, and Palantir have chosen WTI as their debt partner. The below is a transcript of an interview with Dave Gravano, who has 17 years of venture lending experience and is currently an Investment Partner at WTI. WTI has been in the Venture Debt Market for nearly 35 years and has been through several economic cycles.  Can you give us some perspective on how the Venture Debt market has evolved over the years? In 1980 when WTI was founded, capital was far less available than it is now and ironically, companies were much more capital-intensive. We actually started out leasing server infrastructure, computer hardware, and lab equipment. There weren’t a lot of venture debt players until the mid-1990’s when venture capital dollars started to significantly ramp. Then, when the dot-com bubble burst there were several venture debt firm casualties. Today, the market is as crowded as ever with both venture debt firms and banks aggressively playing. WTI has invested capital in hundreds of game-shifting companies, including   Facebook and Google. With the myriad of options that companies have for debt financing, why has WTI been able to be so successful in attracting top companies? I think the mark of a great lending partner is one that operates consistently and communicates with its existing and prospective portfolio companies in a transparent way through good times and challenging times. Our partnership has deep domain and operational expertise, and we aren’t afraid to roll up our sleeves to help our companies optimize for outcomes. This approach has earned us a great reputation and has built up a lot of loyalty with entrepreneurs who have experienced working with us first hand. Many of them come back to us when they start new companies. Can you articulate how your capital and approach differs from others in the market? At WTI, we seek to provide much-needed risk capital to emerging growth companies in exchange for an acceptable return to our LPs. We believe that our capital is significantly more flexible than all other forms of...

Is Venture Debt overrated and overused for Early Stage companies? The question may sound a bit strange coming from someone who spent well over a decade advocating the benefits of Venture Debt for early stage companies. However, I cant shake the feeling that we’ve now moved into an environment where the benefits of Venture Debt have been over amplified, leading  significant incorrect and overuse of the vehicle. First off, there are a few things I won’t debate: 1)   Venture Debt if used appropriately can be a fabulous source of non-dilutive capital that can help companies extend out cash flows and optimize equity ownership stakes of investors and employees. 2)   Venture Debt from an experienced and reputable lending partner can have benefits outside of capital and significantly mitigate many of the risks that I cover in this post. 3)   Venture Debt is easier and cheaper than ever to get today. We’re in a strong capital market marked by historically low interests levels couple with a crowded and fierce competitive lending landscape. As a brief recap, what is Venture Debt? Put simply, it’s a non-dilutive form of Term Debt financing for Venture Capital backed startups. To reduce complexity and ambiguity, Venture Debt in this post is only in the context of term debt financing to early stage companies — think Series A companies in cash burn mode. As such, I’m ignoring things like Accounts Receivable based or Recurring Revenue Working Capital lines which are distinctly different vehicles with different use cases and terms. While we are at it, let’s debunk the myth that somehow stills subsists that Venture Debt is a substitute for Venture Capital financing. It’s not. The only reason lenders provide cash-burning companies with debt facilities whose maturity dates exceed current cash runways are the expectation that the next round of equity will occur.  Thus, the key driver for Venture debt availability is the quality of investor syndicate. Backed by Sequoia and Greylock? Doors are wide open for business. That same company backed by Joe VC (apologies if there is one out there)? Good luck trying to acquire Venture Debt financing. Let’s illustrate the use of Venture Debt through an example.  Company X raises $4MM in Venture Capital Financing through a Series A round of financing and is projecting a cash burn of $750K/quarter. Believing that additional cash runway would be helpful to meet defined milestones prior to Series B, the company secures $2MM in Venture Debt Financing. Let’s say that the Venture Debt accrues interest at 8% and has a 6-month “draw-down” allowance (the window during which the company has the option of borrowing on the committed capital). From there, all borrowed capital amortizes...