Over the past few years, debt has evolved from a balance sheet burden to a benefit within the venture community. Debt funds, finance companies, banks, and hedge funds have all taken on venture lending positions in order to capitalize on the explosive growth in this industry. Yesterday, an article in the Wall Street Journal, titled “Venture Funding Twist,” reported on the increasing popularity of debt for venture-backed companies . The venture debt market is still rebounding from the demise of the internet bubble in 2001, but according to research firm, Venture One, it is now roughly a $2 billion industry in the US and in 2006, represented approximately 7% of the money invested in US venture-backed firms.
Now that the venture debt market is established and growing (as well as continuously changing) how can CEOs/CFOs be expected to navigate through the lenders, the terms, the options, etc. to find a deal that properly satisfies the company’s financing objectives, while providing a secure and safe relationship with a reputable firm? Debt Advisors Group, Inc. (DAG) has consulted for more than 390 companies* in various stages of development from the life sciences sector to high technology. We have forged relationships with over 40 lenders and maintain a library of roughly 530 proposals, which allows us to aid companies in their pursuit of the best and most suitable debt deal. DAG understands not only our clients’ diverse financing needs but also how to match those various objectives with the appropriate lenders based on lenders’ risk and loan structure preferences.
This month’s case study shows how our knowledge of the lending landscape and debt market allowed us to craft a solution for a specialized debt financing need.
A representative early stage pharmaceutical company, “Drug Corp,” with $65MM in venture capital financing was looking to supplement its current equity position in order to extend its cash runway and also enhance its bargaining position between equity rounds.
The company sought debt financing in the form of a $5MM venture loan to be used at the company’s option for working capital, equipment purchases, and software needs. As the venture debt market has evolved, lenders’ risk appetites have expanded and growth capital lines have become increasingly popular. Lenders who typically needed collateralization are now able to provide venture funding in larger line amounts at competitive rates.
Drug Corp’s Chief Financial Officer (CFO) with guidance from the DAG team recognized the benefit of layering a line of debt over an upcoming equity raise for insurance purposes rather than for immediate cash needs. DAG recommended using debt as a complement to equity (and a leverage for expensive money), rather than a substitute.
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