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 debt capital currently in the market. It has no covenants associated with it and it is not part of a package that includes deposits etc. We get comfortable with risk by taking a deep look at the underlying business and team, and not just relying on investor syndicate. Fully understanding a business model allows us to eliminate perceived risk that clouds the traditional lending risk profiles of companies.
Take us through WTI’s process of evaluating Venture Debt opportunity? In particular, tell us the key metrics that you analyze carefully before investing into a company?
First and foremost, it starts and ends with the team. If we’re not confident that the team can execute and communicate with us in a transparent way, then we’re going to struggle to get comfortable. Of course, we also closely evaluate factors such as revenue growth, competitive landscape, upside potential as well as the financial statements and the make-up of the cap table. The composition of the cap table is important, as it enables us to analyze the upside potential of a deal (WTI takes equity in the form of warrants for their deals), and potentially predict investor motivation.
You mentioned earlier that the debt market is crowded. For a company, is the choice of lender a simple exercise around who is providing the best terms?
No. While a deal needs to be economically feasible and within market, the most important decision variables are qualitative to ensure alignment of interests. Things like funding source and organizational structure are important to consider because they inform how the lending partner is likely to behave under certain circumstances. These details can also indicate whether the lender will take a short or long-term view. Additionally, the company needs to be able to identify whether the lender will be able to provide more capital under various scenarios. Entrepreneurs should map out various scenarios and ask for the lender’s perspective on each if additional debt will be needed.
Finally, check out the lenders reputation in working with companies during tough times. This is THE most important factor.
What mistakes do you see companies make when taking on Venture Debt?
1) I mentioned this in my previous answer, but not doing enough diligence on the lender is the #1 mistake companies make. Ask the lender for references, and of course do your own independent diligence. If the track record for working through tough times is spotty, its best to select a different debt partner.
2) Unfortunately, the seductive nature of cheap and easy capital leads to management teams trying to raise too much debt too soon without understanding the potential complications when things don’t go 100% to plan.
3) Not being transparent when bumps in the business are encountered. Many are fearful of adverse lender reaction if they let the lender know about the various speed bumps. This couldn’t be further from the truth. Not being transparent creates unpleasant surprises and severely reduces the chances of a lender working with you when you really need them.