What is venture debt?
Venture debt is a type of funding designed for scaling and high-growth businesses. It is typically best suited to businesses that have already completed a professional funding round, although this is not a mandatory.
Debt funding is provided to a business and paid back with interest over an agreed term. Often considered “cheaper” than equity due to the potential upside in equity value over time.
Qualifying requirements will vary by debt funding providers. At Mighty, you’ll need to be an Australian business or at least have an Australian entity that is generating revenue, have generated $50k+ in monthly revenue for the past 12 months, and provide comfort around serviceability over the term.
This is one of the key differences to traditional business loans, as businesses do not need to be profitable to qualify for funding.
What are the key benefits?
The main benefit to venture debt as a type of startup financing is minimised dilution for founders and founding team members.
Venture capital funding is often vital for early-stage start-ups to fund innovations and product development, to connect with strategic advisors and have access to networks to accelerate growth. However, for later stage start-ups who have proven product market fit and have demonstrated business growth and future potential, these founders know the value of their business and are reluctant to give away more of their business every time they need to grow.
Debt funding provides businesses with the capital needed to scale and take advantage of growth initiatives, without having to sacrifice more equity and control.
Other benefits include:
- Bring forward expansion: invest in growth opportunities as they arise.
- Extend runway: have more time to hit milestones between capital raises, scale operations and strengthen market position.
- Complement equity: consider using debt alongside equity in your next funding round to minimise additional dilution.
Considerations for Founders
There are several key considerations for founders looking at venture debt.
- Just like venture capital and other more familiar startup financing options, debt funding is not for every business or for funding all types of initiatives. Have a clear plan for your use of funds and leave yourself time for research to make sure you choose the right approach for your business at that time.
- Meet with multiple lenders and look for a partner in your debt provider. Whilst venture debt providers don’t take board seats, it’s still important to establish a relationship with your lender and to make sure you’re working with a partner that has a shared interest in your business growth.
- When reviewing a debt agreement, make sure you review and fully understand the terms. And most importantly, make sure the terms are aligned to your business needs and allow you the flexibility that you need to grow.
Global Trends
Debt funding is still small in Australia, estimated to only contribute about 2-4% towards total startup financing according to ‘The State of Australian Startup Funding’ report by Cut Through Ventures.
This is significantly less than other global markets, with venture debt in the US estimated to represent up to 18% of total venture funding. If we follow trends seen in the US, we could be looking at 5x growth locally over the next few years.
We expect to see increased adoption by founders and business owners here in Australia, continued flexibility in terms and solutions that are genuinely built for founders, and greater integration with equity funding.
Are you one of Australia’s savvy founders considering venture debt? Join the additional 70+ businesses in our portfolio who have benefitted from debt funding.
Check out the other resources in our blog or schedule an intro call to understand more about Mighty Partners.
