To Forge a Successful Venture Debt Deal, Align Stakeholder Incentives
In recent years, privately held startups seeking faster growth have increasingly looked beyond their initial equity investments to venture debt financing. Venture debt tends to be less dilutive than equity, and it’s become more available over time: venture banks, specialty finance companies and an ever-expanding roster of non-bank debt funds now are lending across the corporate-growth spectrum.
With more players in a broader market, potential deals have become increasingly varied and complex. But the more complex the transaction, the more difficult it is to make sure each party gets what it needs. And if there’s one thing Capital Advisors Group has learned over the last fifteen years helping clients navigate the venture-debt financing process, it’s that effectively aligning the incentives of all stakeholders is the best way to ensure the success of a deal.
Our new white paper—Early-Stage Debt Financing: Stakeholder Perspectives—provides a succinct overview of the incentives motivating the three major constituents in any venture debt deal. Founders and management of startup companies seek capital to finance product development, faster time-to-market, and initial sales. Venture backers look more toward investment returns that should ultimately be driven by that growth. And lenders seek to balance the risk of leveraging yet-to-be-proven companies against the prospect of growth that should ensure a fair return on the loan along with potential future add-on business.
The report provides illuminating background on what each of the three parties need, along with perspective on how to balance incentives to forge a successful deal. If you’re a lender, investor, or potential borrower who needs to understand the dynamics underlying this increasingly complex marketplace, our report on venture debt stakeholder perspectives is a great place to start.